Buying stocks that are near a low is a very different trading style than buying stocks that are breaking out to new highs. The obvious difference is that it requires taking a position that is likely to be contrary to the current momentum of the stock. There are also some subtle differences in the way stocks trade when they are falling versus when they are rising. And don’t forget the fact that stocks generally fall faster than they rally.

In Chapter 6 I discussed the tactics of fading the OR low, or buying a stock using the OR low as the reference point. One of the most important points in Chapter 6 was that fading the 30-minute OR low does not mean buying stocks because it is 10:00 AM. There isn’t anything magical about 10:00 AM. The market does often reverse its initial morning direction around this time, but this tendency is not reliable enough to be the sole requirement for initiating a trade. It is important to let the market demonstrate that the OR low is a significant price point. This book has emphasized the importance of letting the market define the critical price levels at or near the OR high; fading the OR low requires the same type of market analysis.

Let’s create a basic trade setup checklist for a trading approach based on buying stocks near the low of their OR. You may want to replace some of these questions with your own criteria.

Trade Setup for fading the OR low:

1. OR characteristics (see Chapter 4 for details)

1. Is there well-defined support near the OR low?
2. Was the OR low formed with big volume?
3. Is there a bullish reversal pattern at the OR low?



2. The big picture (use daily chart)

1. Is the OR low above or equal to yesterday’s low?

Note: The prior day’s low represents a level of support or resistance. If the stock is trading below the prior low there is an increased level of risk when establishing a long position.

2. Is the daily trend up?

Note: Here is an easy way to measure the strength of the trend using simple moving averages. In a strongly-trending stock the 10-day moving average is above the 20-day, which is above the 50-day moving average, and they are all positively sloped.

3. Did the stock gap higher, and if so, did it gap over the prior day’s high?

Note: Gaps that are not excessive are bullish. But gaps that trade below the low of the OR are very dangerous! Avoid being long a stock that has gapped higher and is currently trading below the OR.

3. Price and volume action that supports buying the OR low (see Chapter 6 for details).

1. Is this a second test of the lows?

Note: Look for double bottoms. If it is the third of fourth swing down to the lows approach the stock more cautiously.

2. Was there a clear rejection (strong bounce) off the OR low area?

Note: This can include trading below the OR followed by a sharp quick rally.

3. Has the stock consolidated and formed a base from which it can rally?

Note: This pattern was discussed in Chapter 6. See Figures 6-1 and 6-2 for examples.

4. Is there a positive intraday relative strength pattern?

Note: This pattern was discussed in Chapter 6. See Figure 6-3 for an explanation.

This list clearly emphasizes that the big picture should be bullish. It could also be argued that if the stock’s big picture is extremely oversold, an opportunity could exist to trade from the long side. I, however, would prefer to have the big picture trend going in the same direction as my potential trade.