Lower Lows: How Strong Stocks Get Their Groove Back

How many lower lows does a stock have to make before you interested in buying it? If you answer is "none!", then read on and find out what our research tells us about stocks making lower lows.

Traders are never more bullish than when stocks are going up and making higher highs. Unfortunately, traders are never more bearish than when stocks are going down and making lower lows. I say "unfortunately" because our analysis of millions of short term stock trades between 1995 and 2007 only reaffirms the old trading religion of buying low and selling high as the surest way to success as a stock trader. And it is "unfortunate" because this psychology is one of the main, and most important, barriers between success and the average retail short-term stock trader.

The psychology is very easy to understand. As prices move lower, the loss in value encourages others to sell, sending prices lower still. For the person thinking about buying the stock--perhaps not unlike potential homebuyers in the housing market of 2008--what's the hurry? Lower prices seem to beget lower prices in a self-sustaining spiral downward.

With stocks, this is often the case. But there are instances when the odds are such that there will not be a bottomless spiral. Sometimes, when the conditions are right, instead of falling indefinitely, the stock will bounce, some times a bounce that is significant and tradable.

We looked into whether or not stocks that were moving aggressively lower, with five or more lower lows, were good or bad bets for traders in the short term. Did the "buy low, sell high" maxim apply to these stocks.

When the conditions were right, suggested our research, the answer is that stocks making five or more lower lows actually have positive returns in one-day, two-day and one-week time frames. While this seems counter-intuitive (who among us doesn't remember a stock that made lower lows for five, ten or more consecutive sessions and did not have any positive returns--sometimes ever again?), we can see how certain stocks, strong stocks in pullback, for example, might actually fall for several days before finding support and resuming their advance.

These are the stocks we are looking for as buyers of pullback and traders who look to buy weakness and sell strength. The key condition for buying stocks making five or more lower lows is that the stock in fact be a strong stock, which we establish by making sure the stock is trading above its 200-day moving average. But once we are convinced that this condition is taken care of, stocks that have experienced five or more consecutive lower lows are among the stocks we are most interested in acquiring for short term trades.

Click here to read our research into stocks that have made five or more consecutive lower lows.

In addition to having made five or more lower lows and being above their 200-day moving averages, all of the stocks in today's report have Short Term PowerRatings of 8. This puts all three in that class of stocks that our research suggests is likely to outperform the average stock by more than 8 to 1.

The 2-period Relative Strength Index (RSI) values for each stock are also provided for comparative purposes, as well as to show how oversold this trio of stocks is as of the most recent close.

Inland Real Estate (IRC | Quote | Chart | News | PowerRating)

Oriental Financial Group (OFG | Quote | Chart | News | PowerRating)

Sanderson Farms (SAFM | Quote | Chart | News | PowerRating)

For more simple and straightforward tips on short-term stock trading, consider getting a copy of our free report, written especially for those who trade stocks in the short-term "sweet spot" of five to eight days. Click here to get your copy of "5 Secrets to Short Term Stock Trading Success"--or call us at 888-484-8220--and see what the TradingMarkets approach to trading can do to make you a better trader.

David Penn is Senior Editor at TradingMarkets.com.