Downtrend: Lower Highs and Lower Lows
A downtrend is a sequence of lower swing highs and lower swing lows. It is defined by the order of those points rather than by the angle of a line, which matters because a chart can look like it is falling without the sequence being intact.
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How it works
A downtrend is two conditions at once. Each swing high is below the previous swing high, and each swing low is below the previous swing low. One without the other is something else.
The definition is about order, not angle. A steeply falling chart whose swing lows are flat is not in a downtrend by this definition, and a gently drifting one with a clean sequence is.
Which swings count is a setting. A 0.5% swing filter marks many small turning points and a 3% filter marks only a few on the same chart. The sequence is different at each, and both readings are honest.
What the runs look like
How long does an unbroken run of lower lows last? It ends the first time a rally sets a higher low, and in a two-sided market that happens often, so long unbroken runs are the exception.
Plan for short runs. A trend trade held for a third and fourth leg is holding through the part of the sequence where each further leg is less likely to arrive.
The asymmetry people describe is about pace rather than length. The S&P 500’s worst fall took it from 1565.15 in October 2007 to 676.53 in March 2009, about seventeen months; the climb back above that peak took until March 2013.
The rallies inside a downtrend are the problem. They are fast, they are large relative to the bars around them, and they end most short positions that were sized as though the trend would simply continue.
In practice
The participation check is directional. Volume expanding on the falls and thinning on the bounces supports the sequence; the reverse pattern is the early warning that it is ending.
Every downtrend contains uptrends on a faster chart. That is not a contradiction; it is what a retracement looks like when you zoom in, and it is why the timeframe has to be stated before the word means anything.
A gap is where the largest single moves land, and a stop on a short position gives no protection against one that opens above it.
The stop belongs above the most recent lower high. Price above that level has broken the sequence, which is the definition of the trade being wrong.
Repeated attempts to call the bottom are the expensive habit. Each is a round trip paying the spread and commission, before any question of being right.
One structural point explains the pace. Resting buy interest below the market thins as price falls through it, so the same order size moves price further — which is a mechanical reason for the speed rather than a psychological one.
One practical consequence of the speed asymmetry deserves stating on its own: time stops behave differently here. A long position that goes nowhere for twenty bars is usually dead money. A short that goes nowhere for twenty bars is often sitting in the compression that precedes the next fall, because falling markets spend more of their time coiled and less of it traveling.
That does not make patience free, and it does change what the waiting means. The check worth running is whether the swing highs are still lower — if they are, the position is intact and slow; if one has printed higher, the sequence is broken regardless of how the position looks. Let the structure decide the exit, not the clock, and the difference between a stalled trade and a working one stays visible.
What a downtrend is not
It is not a falling line. The sequence is the definition, not the slope.
It is not permanent. Every run of lower lows ends eventually.
It is not free money to short. The rallies inside are the risk.
And it is not timeframe-free. It is only a downtrend on a stated chart.
How this connects
A downtrend is a market structure reading, defined by lower highs and lower lows rather than by any indicator.
The definition is sequential, which means it is always confirmed late. A lower low is only a lower low after the bar that makes it has closed.
A break of structure is how it ends - the first higher high against the sequence, which is the same event a change of character describes.
Trend following is the strategy built on it, and short selling is how it is usually traded, with the borrow cost and recall risk that carries.
And most price is not trending at all. On a chart that changes direction constantly, the null case is a trading range, not a trend in either direction.
When it fails
A range read from its upper boundary looks exactly like a downtrend starting. Lower highs appear, the lows hold, and a short taken on the appearance gets covered at the bottom of the box.
The second failure is shorting after the third lower low. The sequence is already mature by then, and the position is being opened into the part of it where a bounce is most likely.
A third is sizing a short like a long. The bounces are faster than the falls, so the same stop distance is hit more often.
A fourth is ignoring the higher-timeframe reading. A daily uptrend containing an hourly downtrend is a pullback, and pullbacks end.
And a fifth is calling the bottom on price alone. A downtrend ends when the sequence changes, which requires a higher low — an event you can wait for rather than predict.
The original data
The deepest downtrend in the S&P 500 since 1950 ran from a 1565.15 close on 9 October 2007 to 676.53 on 9 March 2009, a fall of 56.8%, and the index needed until 28 March 2013 to close above its starting point again.
The timing is the finding worth carrying. Seventeen months down and four more years to get back above the peak: the asymmetry between falling and rising markets shows up in how fast each leg travels and how violently it reverses. So size a short position for the speed rather than the direction, and take the sequence count as a signal about when to stop pressing rather than as evidence about which way the market is going next.
Related
Market structure is the framework the sequence belongs to. Trend following is the method that trades it. And short selling is the mechanics of taking the position.
Downtrends are a lesson in position size. The rallies inside them are violent enough that a short sized for a calm market gets taken out on a move that ultimately goes nowhere. Sizing shorts smaller than longs is a sensible response to that alone.
— Michael Whitman
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