Higher Lows

Higher Lows is a term from the world of technical analysis that describes a specific pattern on a stock price chart. It occurs when the lowest price a stock hits in a given period is followed by a subsequent low price that is higher than the previous one. Imagine a stock dropping to $10, rallying, then dropping again, but this time only to $12. Then it rallies and drops to $13. The series of low points—$10, $12, $13—are “higher lows.” This pattern is a classic indicator of an uptrend, suggesting that buyer enthusiasm is growing. Each time the price dips, buyers step in sooner and at higher prices, preventing the stock from falling back to its previous bottom. This creates an upward-sloping “floor” of support, signaling strengthening positive sentiment in the market for that particular stock.

At its core, a pattern of Higher Lows paints a picture of a power shift in the market. It shows that the sellers, who were previously driving the price down, are losing their grip. Buyers are becoming more aggressive and are willing to pay more for the stock than they were during the last dip. This growing demand absorbs selling pressure at increasingly higher price levels, forming a staircase-like ascent on the chart. This pattern is often looked at alongside its cousin, higher highs, where each peak price is higher than the last. When a stock is making both Higher Lows and higher highs, it's considered to be in a strong, confirmed uptrend. Conversely, the opposite pattern—a series of lower highs and lower lows—is a tell-tale sign of a downtrend, where sellers are firmly in control.

Now, let's be clear. At capipedia.com, we are firm believers in value investing, which is rooted in fundamental analysis—digging into a company's financial health, competitive position, and management to determine its intrinsic value. Chart patterns like Higher Lows belong to the realm of technical analysis, which focuses purely on price and volume data. A value investor should never buy a stock just because it's forming a nice chart pattern. However, that doesn't mean the concept is useless. When used intelligently, Higher Lows can be a valuable supplementary tool for a value investor.

So, you've done your homework. You've analyzed Company ABC and calculated its intrinsic value to be $100 per share, but it's currently trading at $60 after a significant market downturn. You know it's cheap, but you hesitate to buy, fearing it might fall further—the classic problem of “catching a falling knife.” This is where watching for Higher Lows can help. If the stock hits a bottom at $58, bounces, and then its next dip only reaches $61, you're seeing the first sign of a potential reversal. The market might be starting to recognize the value you've already identified. This technical signal can provide the confidence to start building your position, suggesting that the worst of the selling pressure may be over.

The key is to use Higher Lows as confirmation of your fundamental thesis, not as the justification for it. Your reason for buying is the compelling valuation you discovered through your research. The chart pattern simply provides a clue about when the broader market might be starting to agree with you. It's a signal that the tide might be turning, potentially improving your entry point and reducing the time you have to wait for the market to correct its pricing error.

Think of a tennis player practicing against a wall. If they just let the ball drop, each bounce will be lower than the last—that's a downtrend. Now, imagine the player starts hitting the ball with a racquet after each bounce. On the first hit, they let it drop to one foot off the ground before striking it. On the next, they hit it when it's one and a half feet off the ground. On the next, two feet. The lowest point of the ball's trajectory keeps getting higher. That's a series of Higher Lows. The racquet is the force of the buyers, stepping in with more and more conviction, pushing the price “floor” upwards.

Like any single indicator, the Higher Lows pattern is not infallible. It's a useful piece of the puzzle, but it's not the whole picture. Always remember:

• Trends can break. A beautiful series of Higher Lows can be suddenly shattered by a piece of bad news that sends the stock to a lower low, invalidating the pattern.
• Context is king. Is the pattern forming on low or high volume? High volume on the upswings and low volume on the dips adds more credibility to the uptrend.
• Fundamentals first, always. A great-looking chart for a fundamentally flawed, overvalued company is a trap. Your primary focus must remain on the quality and value of the underlying business.