Lower Highs and Lower Lows

Lower Highs and Lower Lows is a classic pattern in technical analysis that paints a clear picture of a security in a downtrend. Imagine a stock's price chart as a mountain range you're descending. The price hits a peak (a high), then falls into a valley (a low). It tries to rally again, but the new peak it forms is lower than the previous one. Then, it tumbles again, falling into a new valley that is lower than the last. This sequence of successively lower peaks and lower valleys creates a distinct downward staircase on a stock chart. It's the bearish counterpart to higher highs and higher lows, which signals an uptrend. For technicians, this pattern is a red flag, indicating that sellers are firmly in the driver's seat and the path of least resistance for the price is down.

At its core, this pattern reveals a shift in market psychology from optimism to pessimism.

• Lower Highs: This part of the pattern shows that buying pressure is fizzling out. Each time the stock attempts a comeback, sellers jump in earlier and at lower prices, cutting the rally short. It suggests that investors lack the conviction to push the price back to its previous heights.
• Lower Lows: This demonstrates the sellers' dominance. They are so eager to get out that they are willing to accept progressively lower prices. Buyers, on the other hand, are nowhere to be found, only stepping in after the price has broken through its previous floor of support.

Together, they create a powerful narrative: enthusiasm is waning, and fear is taking over.

Now, let's be clear: value investors don't typically base their decisions on wiggles on a chart. The core philosophy, championed by greats like Warren Buffett, is to buy wonderful companies at a fair price. This involves deep analysis of a business's fundamentals—its earnings, debt, and competitive position—to determine its intrinsic value. Chart patterns like this are secondary, if they are considered at all. However, that doesn't mean the pattern is useless. A savvy value investor can use it as a helpful tool in their arsenal.

1. A Clue for Timing: Let's say you've done your homework and found a company whose stock is trading at a market price well below your estimate of its intrinsic value. You're ready to buy. But a quick look at the chart shows a pattern of lower highs and lower lows. This suggests the price might fall further. A patient investor might see this as an opportunity to wait for an even bigger discount, avoiding the classic mistake of “catching a falling knife.”
2. A Gauge of Market Fear: This pattern is the visual embodiment of fear. When a great company's stock is caught in a downtrend, it often means the market is overreacting to bad news or industry headwinds. For a value investor, widespread pessimism is a dinner bell. It's the environment where true bargains are born, allowing you to buy when everyone else is selling in a panic.
3. A Trigger for Review: If a stock you already own starts carving out lower highs and lower lows, it shouldn't be an automatic sell signal. Instead, it should be a signal to do your homework again. Has something fundamentally changed with the business to justify the pessimism? Is there new information you've missed? The pattern prompts you to re-validate your investment thesis, ensuring the company is still the great business you thought it was.

No trend lasts forever. The end of a downtrend is often signaled by a break in this very pattern. A downtrend is officially in trouble when the price fails to make a new lower low. For instance, the price falls but then finds support above the previous low, creating a higher low. If this is followed by a rally that pushes the price above the previous high, creating a higher high, the downtrend is likely broken. This new sequence of higher highs and higher lows is the first sign that an uptrend may be starting. For the value investor, this could be the confirmation that the worst is over and the market is beginning to recognize the company's true value.