Market Top or Pullback? How to Tell the Difference

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Most falls feel like the start of something bigger. The history says most of them are not, and a few signs separate the ones that are

Published: 17 October 2026 · Last updated: 17 October 2026 · By Spencer Li, CFTe

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“This is probably the top of this bull market.” A trader posted that on a stock forum in June 2026. Every sell-off brings a wave of posts like it.

Here is the short answer. In the moment, nobody can tell a top from a pullback for certain. But the odds favour the pullback. From 1950 to October 2022, the S&P 500 had 38 falls of 10% or more on a closing basis. Only 11 of them, or 29%, went on to become bear markets of 20% or more.

What separates the real tops is a cluster of warning signs that build over weeks, usually while prices are still near their highs. There are 5 to watch: distribution, narrowing breadth, bonds turning first, leaders breaking down, and the index’s own structure breaking. One sign on its own is noise. Several at once deserve your attention.

How often does a pullback turn into a bear market?

Less often than it feels. The figures below are for the S&P 500 on a closing basis from 1950 to October 2022, counted from the Yardeni Research tables of bull and bear markets (October 2022 edition).

Two things stand out. At 10% down, the odds are well in favour of a pullback. But once a fall reaches 15%, the odds of it going on to 20% rise to about 3 in 5. Each step down makes the next step more likely.

Do note the 20% line is a convention, and the market does not know it exists. Six falls from 1950 to 2022 stopped between 17% and 19.9%, including 1990, 1998 and 2018. Every one of them turned back up. The 2025 fall, from 19 February to 8 April, stopped at 18.9%. A rule built on the exact 20% line inherits that noise.

What are the 5 warning signs that show up before a real market top?

None of these is a timing signal on its own. They are the signs that, together, separate a top that is forming from a pullback inside a healthy trend.

1. Distribution days pile up. William O’Neil, the founder of Investor’s Business Daily, built his market timing around this idea. A distribution day is a day when volume rises from the day before while the index makes little or no headway. On a down day, the index “should decline more than 0.2%” to count. His key point is that distribution happens while prices are still rising, which is why so few people notice it.

His book gives the count in more than one place, and the figures differ. In one passage, 4 or 5 days of definite distribution over 4 or 5 weeks means the market “will almost always turn down.” Elsewhere, his firm’s rule was 5 or 6 distribution days in any 4 to 5 week window. So treat the count as a range rather than an exact trigger.

2. Breadth narrows. Near a top, the index can keep rising while fewer and fewer stocks join in. The big names carry the average, and the rest quietly roll over. Our guide on what market breadth is explains how to measure it, and the advance/decline line is one of the simplest tools for it. An index at new highs with a falling A/D line is the classic warning.

3. Bonds turn first. John Murphy’s work on intermarket analysis found that “near market tops, the bond market will usually turn down first.” In 1987, bonds broke down in April and stocks topped in August. The lead varies, so this is background, never a trigger.

4. The leaders break. The stocks that led the advance start failing on heavy volume. O’Neil noted that by the time the index shows a clear top reversal, leading stocks have usually been under distribution for days or weeks.

5. The index structure breaks. In an uptrend, the index makes higher highs and higher lows. A close below the last higher low is the first warning. A lower high followed by a lower low is the evidence. Our post on market structure walks through that sequence step by step.

If you want a short daily routine that keeps you checking these things before you act, our free 15-Minute Swing Trader’s Checklist covers it. Get the free checklist →

Why do so many people call the top too early?

Mostly, they are early. A falling market always comes with a story, and stories are convincing. Every 5% dip gets an explanation within hours. Our post on the narrative fallacy looks at why the mind grabs those stories so quickly.

There is also a crowd effect. When everyone online is calling the top, it feels risky not to agree. That is herd mentality at work, and it pushes people out of good positions at exactly the wrong time.

Does a recession make a bear market worse?

Yes, by a clear margin. The 3 deepest S&P 500 bear markets since 1950 all came with a recession: 48.2% in 1973 to 1974, 49.1% in 2000 to 2002, and 56.8% in 2007 to 2009. The deepest bear without a recession was 1987, at 33.5%, and it was over within 4 months.

So the question to ask once a fall passes 20% is whether the economy is heading into a recession too, because the answer shapes how deep the fall is likely to go far more than any chart pattern does.

So what should you do when you are not sure?

A sensible default is to treat every fall as a pullback until the warning signs say otherwise. But that is no reason to wait for certainty to manage risk. The stop on each position does the deciding, one trade at a time. If the market is only pulling back, most stops hold. If it is topping, the stops take you out in stages, long before anyone on the news calls it a bear market.

That approach does not need a forecast. It needs a plan that was written before the fall started. Our guide to money and risk management covers how to set that up.

So, on the market you trade right now, how many of the 5 warning signs can you actually see? And are you reacting to the signs, or to the headlines?

FAQ

How do you know if the market has topped?

You usually only know for sure afterwards. Before that, the signs to watch are distribution days piling up, narrowing breadth, bonds turning down first, leading stocks breaking, and the index making a lower high and a lower low.

What is the difference between a pullback, a correction and a bear market?

The usual convention is that a pullback is a fall of less than 10%, a correction is a fall of 10% to 20%, and a bear market is a fall of 20% or more from the high. The lines are conventions, and several falls since 1950 stopped just short of 20%.

What percentage of corrections become bear markets?

From 1950 to 2022, 11 of 38 S&P 500 falls of 10% or more went on to reach 20%, or about 29%. Once a fall reaches 15%, about 61% went on to reach 20%.

What is a distribution day?

A day when market volume rises from the day before while the index stalls or falls. In William O’Neil’s method, a down day must fall more than 0.2% to count. Several in a few weeks is a warning that big investors are selling.

Should you sell everything when you think the market is topping?

Most traders do better managing each position with its own stop than making one big call. A top is only clear afterwards, and selling everything on a guess risks missing the rebound if it was a pullback.

Go deeper

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About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with over 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public: every trade since April 2024, dated, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.

Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.

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Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.