"Buy low, sell high" is a common sense which almost sounded logic to most investors, but under difference circumstances, it could be a highly risky strategy, especially when stock is breaking new low.
What is new low? By definition, a new low is a level where price break below its recent lowest in a particular time frame. If stock price should break below its all time low, it is called historical new low. Price of a stock will fall because buyers are not willing to pay higher, while sellers sell to buyer without asking for any premiums. If a stock price breaks a new low, it means that there are no buyers willing to pay even the recently lowest price, and the sellers are selling to buyer even at a price lower than the recent low. This shows that the selling pressure is stronger than the buying interest at that particular moment.
In addition, when a stock is trading at a new low, it means that all share holders who has their positions earlier are now losing money. Try imagine, under what circumstances would a seller sells his position at a loss? He or she must be desperate and fearful, and he or she is cutting loss, or his or her positions are being force-sold.
When stock is trending down, the characteristic is that each rebound hits a resistance lower than the previous resistance, and breaking new low. As indicated by Chart 1, a1, b1, c1, and d1 are the lower resistances which we called "Lower-highs".
|A||Price rebounded at RM 14.60, and RM 14.60 was the support.|
|B||Price broke below RM 14.60 (New Low), suggesting all share |
holders with positions above RM14.60 were losers.
|C||Price rebounded slightly at RM12.60.|
|a1||Although price rebounded, it was resisted at the RM 14.60 |
and started falling again there-after.
|D||Price broke below RM 12.60 (New Low), suggesting all |
share holders with positions above RM12.60 were losers.
|E||Price consolidated, temporary supported at RM 11.30.|
|b1||Despite price rebounded, it was resisted at a1 level. |
|F||After consolidated for around a month, price broke below |
RM 11.30 (New Low). Although price has discounted 22.6% (from RM 14.60
to RM 11.30), it was trading at new low, and still, all share holders
who bought at RM 11.30 were still losing money.
|c1||Price rebounded 11%, but still resisted at b1.|
|G||Price rebounded at RM 8.55, and RM 8.55 was the temporary |
|H||Price broke below RM 8.55 (New Low), again, all share |
holders who had their positions above RM 8.55 started losing money.
|d1||Although price rebounded and tested RM 8.55 many times, it |
remained resisted by the RM 8.55 resistance line.
The Subconscious of New Low
From Table 1, we can see that whenever a stock is breaking new low, all share holders are losing money, and despite many attempts and rebounds, each rebound could only hit a high which is lower than the previous resistance (Lower Highs). Therefore, during a downtrend, the confidence of share holders will decrease.
In addition, there is a very important psychological effect in new low, which is a change of objective. Investors take risk to buy a stock for only 1 reason, which is the hope to make money. However, if price should start falling after they had bought their positions, their objective of making money will slowly fade away, while another objective will emerge unconsciously, which is the objective to break even. In short, when stock is trending down and making new lows, many share holders objectives are now changed to breaking even from their original objective to make money, thus they will remember their entry level more than anything else, and their memories of price would be the resistance of the stock price.
As shown on Chart 1, arrow B, D, F, and H are the strongest memory of investors which share holders changed their objective from making money to breaking even, thus a stronger resistance.
Chart 2 is an example of New low of Lionind  from 29/05/2008 to 29/10/2008, it shows that whenever price broke new low, it has more downside risk.
In conclusion, when a stock is making new low continuously, it is highly risky to buy at the new low, because no body knows where is the lowest rebound. In other words, there will be many new lows, but only 1 low is the lowest; therefore, chances for an investor to pick the wrong low is higher than picking the right low. In reality, investors should learn the right concept of trading, which is to buy only on the uptrend.