Glossary of Terms– the language used in trading is complex. However, help is at hand, the glossary below should help translate some of the terms into a language everyone can understand.
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.
Advance Decline Ratio The ratio of advancing issues over declining issues. Taking the moving average of the AD ratio will smooth it so it can be used as an overbought and oversold indicator.
Advancing A market stage of a stock that is characterized by an uptrend with subsequently higher highs and higher lows.
After Hours Any trade posting, adjusting, or changes made by specialists or member firm after the official close of the market.
All or None A type of order issued to a broker by a buyer or seller to fill the order completely or not at all. There are no partial transactions.
Alpha A measure of the residual risk that an investor takes for investing in a fund rather than a market index. It represents the difference between a mutual fund’s actual performance and the performance that would be expected based on the level of risk taken by the fund’s manager. If a fund produced the expected return for the level of risk assumed, the fund would have an Alpha of zero. A positive Alpha indicates the manager produced a return greater than expected for the risk taken. A negative Alpha indicates the manager has not adequately rewarded investors for the risks taken.
Alternative Investment Market (AIM) is a sub market of the London Stock Exchange allowing smaller companies to float shares within a more flexible regulatory system than in the main market. No requirements are needed for capitalization or number of shares issued.
American Depository Receipt (ADR) Securities issued by commercial banks that represent the shares of a foreign company. ADRs trade just like normal stocks on various US stock exchanges. Their performance usually parallels that of the parent company on its domestic exchange. StockCharts.com does not have access to ADR data.
AMEX The term used for the American Stock Exchange.
Amortization The paying off of debt in regular installments over a period of time.
Analyst A person with expertise in evaluating financial instruments; he or she performs investment research and makes recommendations to institutional and retail investors to buy, sell, or hold. Most analysts specialize in a single industry or business sector.
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.
Announcement Date The date on which a company first publically announces an impending stock split.
Annual Report Popular term for the yearly report made by a company to its stockholders. Federal law requires all registered corporations to make such reports. They usually contain a balance sheet, an income statement, a list of changes in retained earnings, and how income of the corporation was used.
Annualized The translation of periods of less than a year into an annual rate for comparative purposes. To annualize quarterly figures, you multiply them by four.
Arbitrage The simultaneous buying and selling of securities to take advantage of price discrepancies. Arbitrage opportunities usually surface after a takeover offer.
Arms Index (TRIN) A market indicator showing the ratio between the average volume of declining stocks and the average volume of advancing stocks. Generally, a rising TRading INdex is bearish and a falling TRIN is bullish.
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.
Ask Also known as the “offer”, the price that the market maker guarantees to fill a buy order. A buy order placed at the market will usually be filled at the current asking (offer) price. The ask price is usually greater than the bid price.
Assets Any possessions that have value in an exchange.
At the Money An option whose strike price is equal to the price of the underlying security.
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
Average True Range (ATR) An indicator that measures a security’s volatility. High ATR values indicate high volatility and may be an indication of panic selling or panic buying. Low ATR readings indicate sideways movement by the stock.
B
Back Testing A strategy that is optimized on historical data, then applied to current data to see if the results are simliar.
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.
Basing A period where the stock or market is “catching its breath” after a decline, characterized by a flat trading range without any noticeable trend. It is common to see a basing period after a lengthy decline of the stock price. Basing may be a sign of accumulation.
Basis The difference between cash prices and the futures contract prices.
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.
Beta A measure of a security’s systematic or market risk. While most stocks move in in the same direction as the stock market, the level of the beta indicates the degree of correlation between a security and the market. The market is the benchmark and has a beta of 1.
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.
Black Box A proprietary computerized trading system whose rules are not disclosed or readily accessible.
Block A purchase or sale of a large number of shares or dollar value of bonds. Although the term is relative, 10,000 or more shares, or any quantity worth over $200,000 is generally considered a block.
Blowoff See Reversal Spike – High.
Blue Chip Stock A well known, public company that is thought to be in good financial shape and have sound fundamentals (profitability, earnings). An investment in a blue chip is regarded as a safe investment. Examples include Wal-Mart, Coca-Cola and General Electric.
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.
Bond Price Not to be confused with bond yield, it is the amount an investor pays to buy a bond. Bond prices and interest rates have an inverse relationship: when rates rise, bond prices fall; when rates decline, bond prices rise.
Bond Yield The return an investor would earn if a bond was purchased and held to maturity. Usually, the longer the term of a bond, the higher the interest rate that’s paid to the holder, compensating for the inflation risk of having money tied up for a long time. To determine the yield, divide the interest rate by the purchase price of the bond.
Breadth A measurement of the number of issues advancing versus the number of issues declining on a given day or as a moving average. Many measurements are used: advances divided by declines, as a percentage, advances minus declines as a net positive or negative number. The measurement consistently followed is an insight into investor sentiment and is used extensively by market analysts.
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.
Breakout Price of a security emerging from a previous trading pattern. The new price “breaks out” above the high (or below the low) trading pattern lines that enclose all other prices for that security in the preceding period. Breakouts are used by technical analysts to predict substantial upside or downside movement.
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 Bear Ratio The Investor’s Intelligence market sentiment indicator which shows the relationship between bullish and bearish advisors. It is interpreted as a contrary indicator, meaning that if it reflects extreme bullishness, the market is probably at a top.
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 and relates to the upthrust.
Buy Signal A condition that indicates a good time to buy a stock. The exact circumstances of the signal will be determined by the indicator that an analyst is using. For example, it’s considered a buy signal when the MACD crosses above its signal line.
Buy Stop A buy order usually placed above the current price, ensuring that a security would have to trade at the set level before the buy order would be activated. at 35. By placing a buy stop order just above resistance, a trader can ensure that the security will break resistance before going long. On the other hand, traders looking to catch a bottom or intraday low might place a buy stop below the current price, but near support.
Buyback A company’s repurchase of it’s own shares of stock.
Buying Climax A sudden upward movement in the market value of a security characterized by a gap in the prices between one trading session and the next. Used by technical analysts and often considered an indication that a security has been overbought and the price will fall.
Buying on Margin A risky short-term strategy where a buyer borrows money from a broker to make an investment. The buyer believes the stock price will rise and is trying to maximize profits by investing more money in the stock.
C
Call Option The right to buy a stock or commodity future at a given price before a given date. The owner of the call option is speculating that the price of the stock will go up and is therefore bullish.
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).
Capital Gain The profit derived from the selling price exceeding its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn’t been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain.
CBOE Nasdaq Volatility Index ($VXN) An index representing the implied volatility of a hypothetical 30-day option that is at the money, derived from a basket of put and call options.
Channel When prices trend between two parallel trendlines, this is referred to as a channel.
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.
Commodities Raw materials such as gold, pork bellies, or orange juice. Traders in commodities buy and sell contracts (also called futures) for such materials.
Commodity Channel Index (CCI) Developed by Donald Lambert, the CCI is an indicator designed to identify cyclical turns in commodities. It may also be applied to stocks or bonds.
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 unweighted 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 agriculturals.
Crossover A point on a graph where two lines intersect. Depending on which lines they are, a crossover may indicate a buy or sell signal. For example, the price line crossing above a moving average line may generate a buy signal.
Cup with Handle A bullish chart pattern that marks a consolidation period followed by a breakout. The “cup” part of the pattern resembles a rounding bottom, and is followed by a “handle” that acts as a final consolidation before a breakout.
Cyclical Stocks Shares of companies that are highly sensitive to economic performance. Cyclical stocks tend to perform well when the economy is growing and suffer when the economy contracts. Chemical (Dupont), transportation (FDX Corp), auto (General Motors), paper (International Paper) and steel (Nucor) represent a few cyclical industries.
D
Day Trading A style of trading where all positions are cleared before the end of the trading day. Contrast this with position trading, where stocks or securities may be held for longer periods.
Declining A market stage of a stock that is characterized by a downtrend with subsequently lower highs and lower lows.
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 Jones Industrial Average A price-weighted average of 30 blue chip stocks published by Dow Jones & Co. Because it is price-weighted, stocks with the highest prices will have the most influence and those with the lowest, the least influence.
Dow Jones Transportation Average An index consisting of 20 stocks in the transportation business. Originally the index only included railroads; now airlines and trucking companies are included. According to the Dow Theory, a new major high in the DJIA should be confirmed by a new major high in this index before it is considered a reliable signal.
Dow Jones Utilities Average An index used as a surrogate for bond prices. The DJUA is often a leading indicator of broad market trends since these stocks are interest-rate sensitive. Utility companies typically have large amounts of debt on which they pay interest and hold cash for capital improvements, so they are affected by interest rate changes sooner than other industries.
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.
Dragonfly Doji A Doji line where the open and close price are at the high of the day. Like other Doji days, this one normally appears at market turning points.
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.
Envelopes Lines that are placed at fixed percentages above and below a moving average line. Envelopes help determine when a market has traveled too far from its moving average and is overextended.
ETF – Exchange Traded Fund Collections of stocks that are bought and sold as a package on an exchange, principally the American Stock Exchange, but also the NYSE, CBOE, and Nasdaq.
Evening Doji Star A three day bearish reversal pattern similar to the Evening Star. The uptrend continues with a large white body. The next day opens higher, trades in a small range, then closes at its open (Doji). The next day closes below the midpoint of the body of the first day.
Evening Star A bearish reversal pattern that continues an uptrend with a long white body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day.
Ex-Dividend Date The first day of the ex-dividend period. If an investor does not own the stock before the ex-dividend date, they will be ineligible for the dividend payout. The exchanges automatically reduced the price of the stock by the amount of the dividend for all pending transactions that have not been completed by the ex-dividend date.
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.
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.
FTSE 100 The leading UK index with the largest 100 companies by market capitalization within it.
Fundamental Analysis A market analyst that relies on economic supply and demand information as opposed to focusing on charts and market indicators for a technical analysis.
Futures Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. These exchange-traded contracts require the delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date.
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.
Gap – Breakaway Breakaway gaps signal a potential change in trend and are especially significant when accompanied by an increase in volume. A bullish breakaway gap forms when a security gaps up after an extended decline. Bullish breakaway gaps can also occur after an extended base or consolidation period. A bearish breakaway gap forms when a security gaps down after an extended advance. Bearish breakaway gaps can also form after an extended top or consolidation period.
Gap – Common Common gaps occur within a trading range or shortly after a sharp move as a reaction. These gaps do not signify the beginning or continuation of a move, but rather represent anomalies. For instance, if a security has declined 20% in a week and gaps up, it would be considered a common gap and not likely to signify a change in trend. Or, if a trading range develops between 20 and 30, and a gap forms in the middle, it is probably a common gap.
Gap – Continuation A continuation gap forms in the middle of a move and in the same direction as the current move. These gaps signal a continuation of the preceding trend and can mark good entry points. After a short or intermediate advance, a continuation up gap is usually considered bullish and signals a renewal of the uptrend. After a short or intermediate decline, a continuation down gap is usually considered bearish and signals a renewal of the downtrend. This gap is also called a measuring or runaway gap.
Gap – Exhaustion After an extended or long move, a gap in the direction of the current move is called an exhaustion gap. For an exhaustion gap to be considered valid, prices should reverse soon after the gap and close the gap. After an extended decline, a gap down could signal that the downtrend is about to exhaust itself. An exhaustion gap is confirmed when prices reverse soon afterwards and move above (or “close”) the gap. After an extended advance, an exhaustion gap would be confirmed when prices reverse soon afterwards and move below the gap.
Gap – Measuring See continuation gap
Gap – Up/Down An up gap forms when a security opens above the previous period’s high, remains above the previous high for the entire period and closes above it. Up gaps can form on daily, weekly or monthly charts and are generally considered bullish. A down gap forms when a security opens below the previous period’s low, remains below the previous low for the entire period and closes below it. Down gaps can form on daily, weekly or monthly charts and are generally considered bearish.
Gravestone Doji A doji line that develops when the Doji is at, or very near, the low of the day.
H
Hammer Hammer candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during an advance, then it is called a Hanging Man.
Hanging Man Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a Hammer.
Harami A two day pattern that has a small body day completely contained within the range of the previous body, and is the opposite color.
Harami Cross A two day pattern similar to the Harami. The difference is that the last day is a Doji.
Head and Shoulders Bottom A well-known reversal pattern marked by three (or more) prominent troughs with a middle trough (the head) that is lower than the other troughs (the shoulders). When the trendline (neckline) connecting the peaks at the top of the pattern is broken, the pattern is complete.
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.
I
Implied Volatility 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 have higher volatilities than NYSE and non-tech 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.
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.
Industry A grouping of companies in the same line of business. Industry groupings are more specific to the business than sector groupings. For example, the transportation sector includes airfreight, airline, trucking, railroad and shipping industry groups.
Initial Public Offering (IPO) The first offering of common stock to the public.
Intermarket Analysis An additional aspect of market analysis that takes into consideration the price action of related market sectors. The four sectors are currencies, commodities, bonds, and stocks. International markets are also included. This approach is based on the premise that all markets are interrelated and impact on one another.
Inverted Hammer A one day bullish reversal pattern. In a downtrend, the open is lower, then it trades higher, but closes near its open, therefore looking like an inverted lollipop.
No glossary for J
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
Laggard An industry or company that is underperforming the market.
Leader An industry or company that is outperforming the market.
Limit Order An order to buy or sell a security at a specific price. As opposed to a market order, limit orders might not be filled immediately if the market moves away from the specified price.
Line Chart Price charts that connect the closing prices of a given market over a span of time that form a curving line on the chart. This type of chart is most useful with overlay or comparison charts that are commonly employed in intermarket analysis. It is also used for visual trend analysis of open end mutual funds.
Linear (Arithmetic) Scaling On a linear (arithmetic) scale chart, the spacing between each point on the vertical scale is identical. Thus the vertical distance between 10 and 20 is the same as the vertical distance between 90 and 100. While this kind of scaling is intuitive and easy to recreate by hand, linear scaling should not be used on charts with large vertical ranges. A move from 10 to 20 is much better than a move from 90 to 100, but on a linear scale they both appear the same.
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.
Logarithmic (Percentage) Scaling On a logarithmic scale chart, the vertical spacing between two points corresponds to the percentage change between those numbers. Thus, on a log scale chart, the vertical distance between 10 and 20 (a 100% increase) is the same as the vertical distance between 50 and 100. Because these charts show percentage relationships, logarithmic scaling is also called “percentage” scaling. It is also called “semi-log” scaling because only one of the axes (the vertical one) is scaled logarithmically.
London Stock Exchange is located in Patermoster square
Long-Legged Doji This candlestick has long upper and lower shadows with the Doji in the middle of the day’s trading range, clearly reflecting the indecision of traders.
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. MACD Histogram A visual representation of the difference between the MACD line and the MACD signal line. The plot of this difference is presented as a histogram, making the centerline crossovers and divergences easily identifiable.
Market Capitalization Also known as market cap, it is the total market value of a company (number of shares outstanding multiplied by the price of the stock). A company with 1 million shares outstanding and a stock price of $10 would have a market capitalization of $10 million.
Market Order An order to buy or sell a security at the prevailing market price. Sometimes referred to as “at the market”, these orders are usually filled immediately by the market maker. A sell order placed at the market will most likely be filled at the bid price and a buy order will be filled at the ask price.
McClellan Oscillator A breadth indicator derived from each day’s net advances (the number of advancing issues less the number of declining issues). Similar to MACD, the McClellan Oscillator is a momentum indicator that is applied to the advance/decline statistics. As a momentum indicator, the McClellan Oscillator attempts to anticipate positive and negative changes in the AD statistics for market timing. Buy and sell signals are generated as well as overbought and oversold readings
McClellan Summation Index A popular market breadth indicator that is ultimately derived from the number of advancing and declining stocks in a given market. Many people regard it as an excellent indicator of the overall “health” of the market and the market’s current trend.
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.
Money Flow Index (MFI) A volume-weighted momentum indicator that measures the strength of money flowing in and out of a security. It compares “positive money flow” to “negative money flow” to create an indicator that can be compared to price in order to identify the strength or weakness of a trend. The MFI is measured on a 0 – 100 scale and is often calculated using a 14 day period.
Morning Doji Star A three day bullish reversal pattern that is very similar to the Morning Star. The first day is in a downtrend with a long black body. The next day opens lower with a Doji that has a small trading range. The last day closes above the midpoint of the first day.
Morning Star A three day bullish reversal pattern consisting of three candlesticks – a long-bodied black candle extending the current downtrend, a short middle candle that gapped down on the open, and a long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first day.
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.
N
NASDAQ 100 Index ETF (QQQQ) The Nasdaq 100 Index tracks the 100 largest stocks listed by the Nasdaq Composite Index. It is the most widely traded Exchange Traded Fund (ETF) in the world, with 91 million shares moving each day. The NASDAQ 100 is often treated as an index of “tech stocks” simply because it’s components are mostly new technology companies.
NASDAQ Composite Index ($COMPQ) The NASDAQ Composite Index is a market capitalization-weighted index of over 5000 stocks. Because it is weighted by market capitalization, large companies such as Microsoft, Intel, WorldCom, Sun Microsystems, Dell Computer and Oracle dominate the index. With such large portion of the index dominated by technology stocks, the NASDAQ Composite is more a barometer for the technology sector than the broader market. The name “NASDAQ” is derived from the National Association of Securities Dealers Automated Quotation (System).
Net Asset Value (NAV) The dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day.
Net New Highs Market breadth indicators that can be used to identify strength or weakness behind market moves. Net new highs are found by subtracting the number of new lows from the number of new highs and are usually calculated for the NYSE, Nasdaq and Amex.
New Highs and New Lows New highs refers to the number of stocks recording their highest price level in 52-weeks. New lows are the number of stocks recording their lowest price level in 52-weeks. Lists of stocks making new highs and new lows are available for the NYSE, Nasdaq and Amex. As an indicator, new highs and new lows are usually shown as moving averages to smooth the results and are often plotted together for easy comparison.
NYSE Composite Index ($NYA) The New York Stock Exchange (NYSE) Composite is an index that measures the market value of all common stocks listed on the NYSE adjusted to account for capitalization changes, new stocks added to the list, and stocks removed from the list. Over 200 years old, the New York Stock Exchange is one of the oldest continuously operating exchanges in the world. It is associated with large-cap, blue chip stocks and is often used as a surrogate for the market as whole.
O
Offer See Ask.
On Balance Volume (OBV) One of the first and most popular indicators to measure positive and negative volume flow, the OBV was introduced by Joe Granville in 1963. The concept behind the indicator is that volume precedes price. OBV is a simple indicator that adds a period’s volume when the close is up and subtracts the period’s volume when the close is down. A cumulative total of the volume additions and subtractions forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation.
Open Interest The number of options or futures contracts that are still unliquidated 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 exteme, the market is oversold.
Over The Counter (OTC) A securities market that is not geographically centralized like the trading floor of the NYSE. OTC securities are traded through a telephone and computer network.
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.
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Paper Trade A hypothetical trade that does not involve any monetary transactions. Paper trading is a risk-free way to learn the ropes of the market.
Pennant A continuation chart pattern that is simliar 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. Penny Stock A stock that usually sells for less than $1/50p per share, though the price may rise because of significant promotion. Penny stocks are very speculative and risky due to their lack of available information and poor liquidity.
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.
Position Trading A style of trading characterized by holding open positions for an extended period of time. Contrast this with day trading, where a trader buys, then sells out of a position before the market closes that day.
Price Patterns Patterns that appear on price charts possessing predictive values. Patterns are divided into reversal and continuation patterns.
Price/Earnings Ratio The P/E ratio is figured by dividing the price of a stock by the company earnings per share. For example, a stock selling at $50, with earnings at $5 per share for the previous year, has a P/E ratio of 10 (50/5 = 10). This value is also called the multiple.
Proxy A security or index whose correlation with another security or index is so strong that it is used as a substitute for the other. For example, General Electric has a very high correlation to the performance of the S&P 500. As GE goes, so goes the S&P 500. Therefore, GE can be used as a proxy for the S&P 500.
Put Option The right to sell a stock or commodity future at a given price before a given date. The owner of the put option is speculating that the price of the stock will go down and is therefore bearish.
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.
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R Squared The measure of diversification that determines how closely a particular fund’s performance parallels an appropriate market benchmark over a period. The market is understood to have an R Squared of 100%. Therefore, a fund with an R Squared of 95% contains 95% of the market’s diversification and risk. The remaining 5% is unique to the fund manager’s actions.
Range The distance between the high price and the low price for a given time period. For example, the daily range is equal to the day’s high minus the same day’s low.
Rate-of-change (percent) A momentum oscillator that measures the percent change in price from one period to the next. The plot forms an oscillator that fluctuates above and below the zero line as the rate-of-change moves from positive to negative. The oscillator can be used as any other momentum oscillator by looking for higher lows, lower highs, positive and negative divergences, and crosses above and below zero for signals.
Reaction High An intermittent peak that forms as a security fluctuates. Whether a security is trending up, trending down or moving sideways, intermittent peaks and troughs form due to changes in supply and demand. Defining reaction highs usually depends on the minimum criteria set for time intervals and price movements.
Reaction Low An intermittent trough that forms as a security fluctuates. Whether a security is trending up, trending down or moving sideways, intermittent peaks and troughs form due to changes in supply and demand. Defining reaction lows usually depends on the minimum criteria set for time intervals and price movements.
Reaction Rally After a decline, an advance that does not surpass the high from which the decline began is known as a reaction rally. A reaction rally, also referred to as a retracement, typically retraces from 1/3 to 2/3 of the previous decline.
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:
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:
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.
Reversal Spike Market turns that happen very quickly with little or no transition period. Spikes often occur when a market has become very overextended in one direction, when a sudden piece of adverse news causes a sudden reversal. Reversal spike highs (aka blowoffs) and lows (aka selling climaxes) can signal a reversal or deceleration of a trend, but unfortunately they are very difficult to forecast.
Reverse Stock Split A stock split which reduces the number of outstanding shares and increases the per-share price proportionately.
Reward-to-Risk Ratio A calculation equal to the potential reward divided by the potential risk of a position. A long position entered at 100 with potential reward estimated at 120 and potential risk of 10 would have a reward-to-risk ratio of 2 to 1. Rounding Bottom Also known as a saucer bottom, it is a reversal chart pattern representing a long consolidation period that turns from a bearish bias to a bullish bias.
Runaway Gap A price gap that usually occurs around the middle point of an important market trend. For that reason, it is also called a measuring or continuation gap.
Russell 2000 The Russell 2000 index tracks 2000 smaller companies.
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S & P 100 Index The S&P 100 Index is a market-capitalization weighted index consisting of 100 large blue chip stocks across various industries. Many fund managers use this index as a benchmark to measure the performance of large cap stocks overall. The market capitalization of the companies in the S&P 100 varies considerably, but in general large companies have a market cap greater than $5 billion dollars.
S & P Large Cap 500 Index The Standard and Poors (S & P) Large Cap 500 Index lists the 500 largest “large-cap” stocks (stocks from major companies in various industries). In 1999, companies in the Index ranged from $500 million to $400 billion in market capitalization.
S & P Mid Cap 400 Index ($MID) The Standard and Poors (S & P) Mid Cap 400 lists 400 mid-size companies in various industries. According to S & P, it is a market-value weighted index. In 1999, the companies listed in the S & P 400 ranged from around $200 million to $10 billion in market capitalization.
S & P Small Cap 600 Index ($SML) The Standard and Poors (S&P) Small Cap 60o Index lists 600 small-cap stocks, chosen for market size, liquidity, and to represent various industry groups. In 1999, the companies listed in the S & P 600 ranged from around $40 million to $2 billion in market capitalization.
Scan A list of stocks, sorted and filtered according to criteria that vary with the scan.
Securities and Exchange Commission (SEC) A federal agency created to regulate and monitor the securities industry. All U.S. companies with stock must abide by the SEC rules and regulations and are required to file quarterly status reports.
Sell Signal A condition that indicates a good time to sell a stock. The exact circumstances of the signal will be determined by the indicator that an analyst is using. For example, it’s often considered a sell signal when the RSI crosses down through the 50 level although we don’t agree with this.
Selling Climax See Reversal Spike
Sentiment Indicators Psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes.
Shakeout A situation where many scared investors exit their positions due to unfavorable news or uncertainty regarding the stock or industry. The dot-com bust was characterized by numerous shakeouts causing many to abandon their dot-com positions, often at great losses.
Shooting Star A single day pattern that can appear in an uptrend. It opens higher, trades much higher, then closes near its open. It looks just like the Inverted Hammer except that it is bearish.
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.
Signal Line Also known as a “trigger line”, it is a moving average of another indicator that is used to generate simple buy and sell signals. Probably the most used signal line is the one that is built into the MACD Indicator display. The signal line is the exponential moving average of the MACD line. A buy signal is generated when the MACD line crosses above the signal line and a sell signal is generated when the MACD line crosses below the signal line although we don’t use these.
Simple Average A moving average that gives equal weight to each day’s price data.
Spinning Top Candlestick lines that have small bodies with upper and lower shadows that exceed the length of the body. Spinning tops signal indecision.
Split The division of a stock into multiple shares. In a 2-for-1 split, the stockholder’s shares will double in quantity, though the value of each stock will be halved. A stock split is usually an attempt to make high stock prices seem more attractive to investors and generally occurs in the face of new highs.
Spread The difference between the bid and the ask. Generally speaking, more liquid (heavy volume) stocks usually have smaller bid/ask spreads. Less liquid stocks (light volume) usually have larger spreads.
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.
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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.
Three Black Crows A bearish reversal pattern consisting of three consecutive black bodies where each day closes near below the previous low, and opens within the body of the previous day.
Three White Soldiers A bullish reversal pattern consisting of three consecutive white bodies, each with a higher close. Each should open within the previous body and the close should be near the high of the day.
TICK Each individual move from one stock trade to another. An UP-TICK means the price moved up on the last trade and a DOWN-TICK means it moved down. If there is no change from the last trade, the TICK is considered neutral. The TICK statistic on the NYSE is the net of all UP-TICKs minus all DOWN-TICKs at a given point during the day.
Top-Down Approach An approach to market analysis used by both fundamental and technical analysts. It often begins with a more “macro” analysis of the overall market through major indices (S&P 500, Dow, NYSE etc.) before concentrating on the market at a more “micro” level. Strong and weak sectors of the market are analyzed before focusing on individual stocks within select groups.
Topping A period where the stock or market is “catching its breath” after an advance, characterized by a flat trading range without any noticeable trend. It is common to see a topping period after a lengthy increase of the stock price. Topping may be a sign of distribution.
Trailing Stop A stop-loss level set above or below the current price that adjusts as the price fluctuates. For a long position, a trailing stop would be set below the current price and would rise as the price advances. Should the price decline and reach the trailing stop, then a stop-loss would be triggered and the position closed. As long as the price remains above the trailing stop, the position is held.
Trend Refers to the direction of prices. Rising peaks and troughs constitute an uptrend; falling peaks and troughs constitute a downtrend. A trading range is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than a year), intermediate (one to six months), or minor (less than a month).
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.
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Up Trendline A straight line drawn upward and to the right below the reaction lows. The longer the up trendline has been in effect and the more times it has been tested, the more significant it becomes. Violation of the trendline usually signals that the uptrend may be changing direction.
Upside Gap Two Crows A three day bearish pattern that only happens in an uptrend. The first day is a long white body, followed by a gapped open with the small black body remaining gapped above the first day. The third day is also a black day whose body is larger than the second day and engulfs it. The close of the last day is still above the first long white day.
Upthrust A situation that occurs when prices break above resistance, but soon reverse course and break back below resistance. Price are said to “thrust” up, but cannot maintain the upward momentum and soon decline. The upthrust can also be referred to as a failed (bullish) signal and is considered bearish. Generally, the reversal should occur within 1-3 days of the resistance breakout for the failed signal to be considered valid.
US Dollar Index The US Dollar Index is computed using a trade-weighted geometric average of six foreign currencies against the dollar.
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Value Line Arithmetic Composite Average ($VLE) The Value Line Arithmetic Composite Average is an equally weighted price index of all stocks in the Value Line Investment Survey. It is referred to as “arithmetic” because the index is computed by finding the mean or simple average.
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 have higher volatilities than NYSE and non-tech stocks 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.
Volatility Index The Market Volatility Index (VIX) measures the volatility of the market. A recent news story described it as “the options market’s gauge of investor fear.” Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there’s excess bearishness, and low numbers indicate excess bullishness. The VIX is updated intraday by the Chicago Board Options Exchange (CBOE), using Standard & Poors 500 Index (SPX) bid/ask quotes. It was created in 1993.
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.
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Washout Day A selling climax or high volume decline that “washes out” all the sellers and paves the way for buyers to take over. This may also take the form of a high volume hammer after an extended decline.
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.
Weekly Reversal An upside weekly reversal is present when prices open lower on Monday and then on Friday close above the previous week’s close. A downside weekly reversal opens the week higher but closes down by Friday.
Whipsaw A whipsaw occurs when a buy or sell signal is reversed in a short time. Volatile markets and sensitive indicators can cause whipsaws
Williams %R Developed by Larry Williams, Williams %R is a momentum indicator much like the Stochastic Oscillator and is especially popular for measuring overbought and oversold levels. The scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. Typically, Williams %R is calculated using 14 periods and can be used on intraday, daily, weekly or monthly data.
Wilshire 5000 Total Market Index ($WLSH) Perhaps the broadest barometer of US stocks is the Wilshire 5000 Total Market Index. This index is made up of over 6500 companies from the NYSE, Amex and Nasdaq. The total market value of the index exceeded $14 trillion at the end of 2000. The index is weighted according to market capitalization and consists only of companies headquartered in the US. Whereas the NYSE, Amex and Nasdaq composite indices include preferred shares, ADRs and foreign issues, the Wilshire 5000 is a pure domestic index of common stocks.
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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.
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