Higher Low/Lower High: Finding A Reversal

A higher low and a lower high are reversal patterns. You tend to see them most often in stocks that either have a
strong uptrend or a strong downtrend.

A Higher Low

We look for this setup in a stock that has been trending down

Whether we are short the stock or flat and looking to get long a higher low will be a good indicator that it is time to buy

Ideally, you want the higher low to be tested before you buy stock

This is a classic setup—It leads to large upmoves

Don’t make it more complicated than it needs to be

If you have identified a buyer at the low and the bid steps up higher and will not drop then you get long the stock

Normal risk/reward rules apply

If the stock has sold off 2 points and you believe that there is the potential for at least a 50 cent upmove then you are
willing to risk up to 10 cents

If the higher low is 10 cents from the low then you can bid above the higher low and still have a good risk/reward
trade

The higher low won’t always get tested

If the higher low isn’t tested you can still buy—but you have less information about the buying interest in the stock
Easy Example

1) Low Established

2) Pulls back to a higher low

3) Second up leg takes out high of 1st up leg

A Little Trickier

1) One Leg Up

2) Shallow Pullback

3) Second Leg Up

4) Then down move below the higher low

Do you hit the stock when it trades below the higher low? If you hit the stock where do you buy it back?

The answer is
1) It depends on how close to the low you are
2) It depends on how much of an upmove you are expecting
a. Which is based on how far down the stock has moved
b. And how much volume was done at the low

What if in the diagram above?

1) 30K shares traded at the low
2) 10K shares traded at the higher low
3) the higher low is five cents above low
4) the stock has dropped 1 point on approximately 50K shares

Conclusion: Almost as much volume has been done between the low and the higher low as the entire downmove.

Which means what? The stock has moved to a price where there is significantly higher buying interest than there was
the entire way down. So I’m gonna give the stock a chance to go up. I want to see the low taken out before I hit my
stock. Ideally, I’d like to see a buyer/buyers hold the bid higher but I’m aware that a really smart buyer will drop the
bid and see if he can get more stock at the low.

Lower High

A Lower High is a good indicator that a stock that has been trending up may be reversing

You can be certain a lower high is established when there is a lot of printing on the offer but the stock fails to lift

Best Case Scenario: You see a lower high held by a seller. Then there is a second lower high held. Stock is clearly
trending down at this point.

When am I looking for a lower high?

1. If I notice a large seller on the offer that leads to a downmove
2. If a stock has been trending up but the upmoves are becoming shallower
3. If the upmoves have become completely out of control and I think the stock has enormous downside potential

Once I have identified a lower high I will get short

What if the lower high lifts? Depends on your risk versus reward

If you were looking to make 50 cents and the lower high is within 10 cents of the previous high you may not cover and
in fact may short more if the previous high holds

i.e. Seller at $30. Seller at $29.90. The $29.90 seller lifts but the stock can’t trade above $30. Then you add to your
position. Your confidence increases once the stock trades below $29.90

What A Reversal May Look Like

Stock is moving to a new high after each pullback. The stock has a pullback but the next up move fails to make a new
high—Good chance stock is reversing

If a stock has one up move then after a pullback fails to make a new high it isn’t necessarily reversing.

Look at these two charts:

Once the reversal is established you can trade as a downtrending stock
1) Covering at the bottom of down legs
2) Reestablishing into up legs

Observe the selling pattern

Pay close attention to the Upmoves

Stay short as long as the stock remains weak