Technical Analysis Glossary

-A-


Accumulation The act of buying more shares of a security without causing the price to increase significantly. After a decline, a stock may start to base and trade sideways for an extended period. While this base builds, well-informed traders and investors may seek to establish or increase existing long positions. In that case, the stock is said to have come under accumulation.

Advance Decline Line One of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal.

Andrew's Pitchfork Developed by Alan Andrews, this concept that uses three parallel lines drawn from three points that you select. The points selected to begin the pitchfork are usually three consecutive major peaks or troughs. The three parallel lines extending out to the right are used as normal support and resistance points.

Ascending Trend Channel An ascending line that connects the bottoms of the down waves and is parallel to a trendline. The ascending channel line and the trendline form borders on an uptrend.

Ascending Triangle A sideways price pattern between two converging trendlines in which the lower line is rising while the upper line is flat. This is generally a bullish pattern.

Average Directional Index (ADX) Part of the Directional Movement Indicator system developed by J. Welles Wilder, the ADX line is based on the spread between the +DI and -DI lines from that same system.

-B-


Bar Chart A popular way to display and analyze financial price information in graphical form. The horizontal axis of a bar chart represents the passage of time with the most recent time periods on the right side while the vertical axis represents the stock's price.

Bear A person who believes prices will decline and might be described as having a "bearish" outlook. Bear markets occur when roughly 80% of all stocks decline for an extended period of time. 1973-74 and 1981-82 have been referred to as bear markets.

Bear Market A long period of time when prices in the market are generally declining. It is often measured by a percentage decline of more than 20%.

Bear Trap A situation that occurs when prices break below a significant level and generate a sell signal, but then reverse course and negate the sell signal, thus "trapping" the bears that acted on the signal with losses. A bear trap is another form of whipsaw.

Bid The price at which the market maker guarantees to fill a sell order. A sell order placed at the market will usually be filled at the current bid price. The bid price is usually less than the ask price.

Bollinger Bands An indicator that allows users to compare volatility and relative price levels over a period of time. It consists of three bands designed to encompass the majority of a security's price action. Prices will often meet resistance at the upper band and support at the lower band.

Box Size In Point & Figure Charts it is the price value of one "X" or "O". An X is shown when prices rise by the box size, and an O is shown when prices fall by the box size. Increasing the box size filters smaller price movements.

Breakaway Gap A price gap that forms on the completion of an important price pattern. A breakaway gap usually signals the beginning of an important price move.

Bull A person who believes prices will advance and might be described as having a "bullish" outlook. Bull markets occur when roughly 80% of all stocks advance over an extended period of time. 1982-87 and 1995-99 have been referred to as bull markets.

Bull Market A long period of time when prices in the market are generally increasing.

Bull Trap A situation that occurs when prices break above a significant level and generate a buy signal, but suddenly reverse course and negate the buy signal, thus "trapping" the bulls that acted on the signal with losses. A bull trap is another form of Whipsaw

-C-


Candlestick Chart A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled).

Channel Line A straight line drawn parallel to the basic trendline. In an uptrend, the channel line slants up to the right and is drawn above rally peaks; in a downtrend, the channel line is drawn below price troughs and slants down to the right. Prices often meet resistance at rising channel lines and support at falling channel lines.

Confirmation A subsequent signal that validates a position stance. Traders and investors sometimes look for more than one signal or require validation before acting. For example: confirmation of a trend change may entail an advance past the previous reaction high. For an indicator such as MACD, confirmation of a divergence may be a subsequent moving average crossover.

Continuation Pattern A type of chart pattern that occurs in the middle of an existing trend. The previous trend resumes when the pattern is complete. Examples include the Rectangle and Pennant continuation patterns.

Correction After an advance, a decline that does not penetrate the low from which the advance began is known as a correction. Also referred to as a retracement, a correction usually retraces 1/3 to 2/3 of the previous advance

CRB Index An un-weighted geometric average of some important commodities. It averages prices across 17 commodities and across time. The index tracks energy, grains, industrials, livestock, precious metals, and agricultures

-D-


Descending Triangle A sideways price pattern between two converging trendlines in which the upper trendline is descending while the lower line is flat. This is generally a bearish pattern.

Distribution The systematic selling of a security without significantly affecting the price. After an advance, a stock may start forming a top and trade sideways for an extended period. While this top forms, a security's shares may experience distribution as well-informed traders or investors seek to unload positions. A quiet distribution period is usually subtle and not enough to put downward pressure on the price. More aggressive distribution will likely put downward pressure on prices.

Divergence A situation that occurs when two lines on a chart move in opposite directions vertically. People often look for divergences by comparing a stock's direction to the direction of its RSI, its MACD or its Stochastic Oscillator. There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher while the stock is declining. A negative divergence occurs when the indicator moves lower while the stock is rising.

Doji A candlestick, with a body so small that the open and close prices are equal. A Doji occurs when the open and close for that day are the same, or very close to being the same.

Double Top A reversal chart pattern displaying two prominent peaks. The reversal is complete when the support trough is broken. The double bottom is a mirror image of the top.

Dow Theory One of the oldest and most highly regarded technical theories. A Dow Theory buy signal is given when the Dow Industrial and Dow Transportation averages close above a prior rally peak. A sell signal is given when both averages close below a prior reaction low.

Down Trendline A straight line drawn down and to the right above successive rally peaks. The longer the down trendline has been in effect and the more times it has been tested, the more significant it becomes. A violation of the down trendline usually signals a reversal of the downtrend.

-E-


Elliott Wave Analysis An approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave pattern shows a five wave advance followed by a three wave decline.

Engulfing Pattern A reversal pattern that can be bearish or bullish depending upon whether it is in an uptrend or downtrend. The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body.

Exhaustion Gap A price gap that occurs at the end of an important trend, and signals that the trend is concluding.

Exponential Moving Average (EMA) A moving average that gives greater weight to more recent data in an attempt to reduce the lag of (or "smooth") the moving average.

-F-


Fibonacci Numbers The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,...) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent, which is a popular Fibonacci retracement number. The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number. It is the ratio of the Fibonacci sequence that is important and valuable, not the actual numbers in the sequence.

Flag A continuation chart pattern that generally lasts less than three weeks and resembles a parallelogram that slopes against the prevailing trend. The flag represents a minor pause in a dynamic price trend.

Fundamental Analysis A market analysis that relies on economic supply and demand information as opposed to focusing on charts and market indicators for a technical analysis.

-G-


Gap Gaps form when opening price movements create a blank spot on the chart. This occurs when the high of the day is below the low of the previous day or when the low of the day is above the high of the previous day. Gaps are especially significant when accompanied by an increase in volume.

-H-


Head and Shoulders Top A well-known reversal pattern marked by three (or more) prominent peaks with a middle peak (the head) that is higher than the other peaks (the shoulders). When the trendline (neckline) connecting the troughs at the bottom of the pattern is broken, the pattern is complete.

Head and Shoulders Bottom – Opposite of the above

-I-


Indicator A value, usually derived from a stock's price or volume, that an investor can use to try to anticipate future price movements. Indicators are divided into two groups: trend following or lagging and momentum or leading. Lagging indicators tell you what prices are doing now, or in the recent past, so they are useful when stocks are trending. A moving average is an example of a lagging indicator. Leading indicators are designed to anticipate future price action and many come in the form of oscillators. RSI is an example of a momentum indicator.

-K-


Key Reversal Day A one day chart pattern where prices sharply reverse during a trend. In an uptrend, prices open in new highs and then close below the previous day's closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.

-L-


Liquidity The ease with which a stock may be bought or sold in volume on the marketplace without causing dramatic price fluctuations. A highly liquid stock is characterized by a large volume of trading and a large pool of interested buyers and sellers.

-M-


MACD (Moving Average Convergence/Divergence) An indicator developed by Gerald Appel that is calculated by subtracting the 26-period exponential moving average of a given security from its 12-period exponential moving average. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics.

Momentum A leading indicator measuring a security's rate-of-change. The ongoing plot forms an oscillator that moves above and below 100. Bullish and bearish interpretations are found by looking for divergences, centerline crossovers and extreme readings. Momentum can also refer to a particular investing or trading style. The rational is that the hot get hotter and the cold get colder. Bullish momentum players buy securities that are popular or that they believe will become popular. As the word spreads and popularity grows, the advance will accelerate. Price acceleration is the same as an increase in momentum.

Moving Average (MA) An average of data for a certain number of time periods. It "moves" because for each calculation, we use the latest x number of time periods' data. By definition, a moving average lags the market. An exponentially smoothed moving average (EMA) gives greater weight to the more recent data, in an attempt to reduce the lag.

-O-


Open Interest The number of options or futures contracts that are still un-liquidated at the end of a trading day. A rise or fall in open interest shows that money is flowing into or out of a futures contract or option, respectively. In futures markets, rising open interest is considered good for the current trend. Open interest also measures liquidity.

Oscillator An indicator that determines when a market is in an overbought or oversold condition. When the oscillator reaches an upper extreme, the market is overbought. When the oscillator line reaches a lower extreme, the market is oversold.

Overbought A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the Stochastic Oscillator exceeds 80 and when the Relative Strength Index (RSI) exceeds 70. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.

Oversold A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp decline from 30 to 15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the Stochastic Oscillator is less than 20 and when the Relative Strength Index (RSI) is less than 30. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.

-P-


Parabolic SAR An indicator that sets trailing price stops for long or short positions. Also referred to as the "stop-and-reversal indicator", Parabolic SAR is more popular for setting stops than for establishing direction or trend. If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price.

Pennant A continuation chart pattern that is similar to the flag, except that it is more horizontal and resembles a small symmetrical triangle. Like the flag, the pennant usually lasts from one to three weeks and is typically followed by a resumption of the prior trend.

Pivot Point The point at which resistance disintegrates and the stock price begins to rise past the prior resistance level. This point can be considered the optimal time to buy as the bulls are gaining strength.

Point & Figure Chart A type of chart consisting of columns of X's (showing price rises) and O's (showing price falls) arranged on a square grid. When the index increases, a rising column of black X's is created -- a rally. When the index falls, a descending column of red O's appears -- a decline.

Put/Call Ratio Based on CBOE statistics, the Put/Call Ratio equals the total number of puts divided by the total number of calls. When more puts are traded than calls, the ratio will exceed 1. As an indicator, the Put/Call Ratio is used to measure market sentiment. When the ratio gets too low, it indicates that call volume is high relative to put volume and the market may be overly bullish or complacent. When the ratio gets too high, it indicates that put volume is high relative to call volume and the market may be overly bearish or in panic.

-R-


Rectangle A continuation chart pattern where prices move sideways between two different levels for a period of time and then continue moving in the direction of the previous trend.

Relative Strength Index (RSI) A popular oscillator developed by Welles Wilder, Jr. and described in his self-published 1978 book "New Concepts in Technical Trading Systems". RSI is plotted on a vertical scale from 0 to 100. Values above 70 are considered overbought and values below 30, oversold. When prices are over 70 or below 30 and diverge from price action, a warning is given of a possible trend reversal.

Resistance Resistance is a price level at which there is a large enough supply of a stock available to cause a halt in an upward trend and turn the trend down. Resistance levels indicate the price at which most investors feel that prices will move lower.

Retracement A decline that retraces a portion of a previous advance, or an advance that retraces a portion of a previous decline. Retracements typically cover 1/3 to 2/3 of the previous move, and a retracement of more than 2/3 typically signals a trend reversal.

Reversal - Inside Day A two-period chart pattern that suggests a potential reversal or deceleration of the current trend. The relationship of the two periods has the follow characteristics:

  • The high is lower than the previous day's high.
  • The low is higher than the previous day's low.

The resulting pattern is a large bar or candlestick with a smaller bar or candlestick nestled completely inside. This basic definition of the outside day does not take into consideration the relationship of the closing levels. The significance of the inside day depends of the prior price action, support, resistance and other aspects of technical analysis. These patterns are not really bullish or bearish, but can foreshadow a significant move or breakout. Although the example provided uses daily data, this pattern can also be applied to intraday, weekly or monthly data.

Reversal - Outside Day A two-period chart pattern that suggests a potential reversal or deceleration of the current trend. The relationship of the two periods has the follow characteristics:

  • The high is higher than the previous day's high.
  • The low is lower than the previous day's low.

The resulting pattern is a smaller bar or candlestick totally encompassed by a larger bar or candlestick. The significance of the outside day depends of the current trend, prior price action, support, resistance and other aspects of technical analysis. An outside day at resistance might be considered bearish, while an outside day at support might be considered bullish. This basic definition of the outside day does not take into consideration the relationship of the closing levels. Generally, the larger the range and higher the volume, the more significant is the pattern. Although the example provided uses daily data, this pattern can also be applied to intraday, weekly or monthly data.

Reversal Pattern A chart pattern that occurs before an existing trend reverses direction. For example, a Head and Shoulders reversal pattern marks a change in trend. A break below neckline support indicates that the H&S pattern is complete and the prior uptrend has reversed.

-S-


Short Selling The process of selling a stock with the hope of buying it back at a lower price (sell high, buy low). Short sellers are bearish and believe the price will decline. Short selling involves borrowing stock (usually from the broker) to sell short and using margin to finance the borrowing. If the price of the stock in question advances too far, the short seller will receive a margin call and be required to put up more money. A short squeeze occurs when the price advances so fast that short sellers are forced to cover their positions (buy the stock back), which drives prices even higher.

Standard Deviation (volatility) A statistical term that provides a good indication of volatility. It measures how widely values (closing prices for instance) are dispersed from the average. The larger the difference between the closing prices and the average price, the higher the standard deviation will be and the higher the volatility. The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility.

Stochastic Oscillator A momentum indicator developed by George Lane that measures the price of a security relative to the high/low range over a set period of time. The indicator oscillates between 0 and 100, with readings below 20 considered oversold and readings above 80 considered overbought. A 14-period Stochastic Oscillator reading of 30 would indicate that the current price was 30% above the lowest low of the last 14 days and 70% below the highest high. The Stochastic Oscillator can be used like any other oscillator by looking for overbought/oversold readings, positive/negative divergences and centerline crossovers.

Stop Loss Order An instruction to the broker to buy or sell stock when it trades beyond a specified price. They serve to either protect your profits or limit your losses.

Support A price level at which there is sufficient demand for a stock to cause a halt in an downward trend and turn the trend up. Support levels indicate the price at which most investors feel that prices will move higher.

Symmetrical Triangle A sideways chart pattern between two converging trendlines in which the upper trendline is declining and the lower trendline is rising. This pattern represents an even balance between buyers and sellers, although the prior trend is usually resumed. The breakout through either trendline signals the direction of the price trend.

-T-


Technical Analysis The study of market action, usually with price charts, which includes volume and open interest patterns. Also called chart analysis, market analysis, and more recently, visual analysis.

Trendlines Straight lines drawn on a chart below reaction lows (in an uptrend) or above rally peaks (in a downtrend) that determine the steepness of the current trend. The breaking of a trendline usually signals a trend reversal.

Triangles Sideways price patterns in which prices fluctuate with converging trendlines. The three types of triangles are the symmetrical, the ascending, and the descending.

Triple Top A price pattern with three prominent peaks, similar to the head and shoulders top, except that all three peaks occur at about the same level. The triple bottom is the mirror image of the top.

-U-


US Dollar Index ($USD) The US Dollar Index is computed using a trade-weighted geometric average of six foreign currencies against the dollar.

-V-


Volatility A measurement of change in price over a given period. It is usually expressed as a percentage and computed as the annualized standard deviation of the percentage change in daily price. The more volatile a stock or market, the more money an investor can gain (or lose!) in a short time.

Volatility (Implied) A key variable in most option pricing models, including the famous Black-Scholes Option Pricing Model. Other variables usually include: security price, strike price, risk-free rate of return and days to expiration. If all other variables are equal, the security with the highest volatility will have the highest option prices. Many NASDAQ and tech stocks (CSCO and AMGEN) have higher volatilities than NYSE and non-tech stocks (G and MRK), and their options are also priced accordingly. One method of measuring volatility is by finding the standard deviation of the underlying security. However, the standard deviation cannot always explain the volatility that is implied by an option's price. Many times the price of an option will reflect more volatility than that measured by the standard deviation. This led to the notion of implied volatility, which is based on option prices. If the option price is known, then plugging in all variables and solving for volatility will yield the implied volatility.

Volume The number of trades in a security over a period of time. On a chart, volume is usually represented as a histogram (vertical bars) below the price chart. The NYSE and Nasdaq measure volume differently. For every buyer, there is a seller: 100 shares bought = 100 shares sold. The NYSE would count this as one trade and as 100 shares of volume. However, the Nasdaq would count each side of the trade and as 200 shares volume.

-W-


Wedge A reversal chart pattern characterized by two converging trendlines that connect at an apex. The wedge is slanted either downwards or upwards demonstrating bullish or bearish behavior respectively.

Weighted Average A moving average that uses a selected time span, but gives greater weight to the more recent price data.

-Y-


Yield Curve A plot of treasury yields across the various maturities at a specific point in time. At the front (left) of the yield curve are T-Bills with maturities of 12, 26 and 52 weeks. In the middle are Treasury Notes with maturities of 2, 5 and 10 years. At the end (right) of the yield curve are Treasury Bonds with maturities of 20 and 30 years. In a normal yield curve, yields rise as the maturities increase. If the yield on shorter maturities is higher than that of longer maturities, then an inverted yield curve exists. An inverted yield curve is a sign of tight money and is bearish for stocks.

-Z-


Zig Zag The Zig Zag (Basic) overlay is a collection of straight lines that connect significant tops and bottoms on a price graph. It takes a single parameter that specifies the percentage that the price must move in order for a new "zig" or "zag" to appear. Zig Zig does not predict trends and should not be used on its own.