Technical Analysis Explained
Page 54
Momentum The underlying power or thrust behind an upward or downward price movement. Momentum is represented on a graph as a line that is continually fluctuating above and below a horizontal equilibrium level, which represents the halfway point between extreme readings. Momentum is a generic term embracing many different indicators, such as rate of change (ROC), relative strength indicators (RSIs), and stochastics.
Moving average (MA) A simple MA is constructed by taking a mean average of a time series over a given period. When the price crosses above or below the MA, a buy or sell signal is given. MAs often serve as support or resistance points.
Moving-average convergence divergence (MACD) An oscillator that measures the distance between two simple or exponentially smoothed MAs.
Nonconfirmation A market is said to be “in gear” when most averages and indicators that form a part of it confirm successive highs or lows. For example, when the Dow Jones Industrial Average (DJIA) makes new highs, but the A/D line does not, a nonconfirmation is said to occur. If other indicators or averages also fail to confirm, conditions are regarded as bearish until the nonconfirmations are cleared up, and vice versa.
Odd lots Units of stock of less than 100 shares; these do not customarily appear on the tape.
Odd-lot shorts Odd lots that are sold short. Since odd lots are usually the vehicle of uninformed traders, a high level of odd-lot shorts in relation to total odd-lot sales often characterizes a major market bottom. A low level of odd-lot shorts compared with total odd-lot sales is a sign of a market top.
Option The right to buy or sell specific securities at a specified price within a specified time. A put gives the holder the right to sell the stock, and a call gives the right to buy the stock.
Overbought An opinion about the level of prices. It may refer to a specific indicator or to the market as a whole after a period of vigorous buying, after which it may be argued that prices are overextended for the time being and are in need of a period of downward or horizontal adjustment.
Oversold An opinion about the level of prices. It is the opposite of overbought—that is, a price move that has overextended itself on the downside.
Price/earnings ratio The ratio of the price of a stock to the earnings per share—that is, the total annual profit of a company divided by the number of shares outstanding.
Price patterns When a trend reverses direction, the price action typically traces out a formation known as a price pattern. The larger and deeper the pattern, the greater is its significance. Patterns that are formed at market tops are called distribution formations; that is, the stock or market is assumed to be undergoing distribution from strong, informed hands to weak, uninformed buyers. Price patterns at market bottoms are known as accumulation formations. Price formations may also represent temporary interruptions of the prevailing trend, in which case they are called continuation patterns.
Rally A brisk rise following a decline or consolidation of the general price level of a security price.
Reaction A temporary contratrend price weakness or consolidation following an upswing.
Relative strength (RS) comparative An RS line is calculated by dividing one security’s price by another. Usually, the divisor is a measure of the market, such as the DJIA or the Commodity Research Bureau (CRB) Commodity Index. A rising line indicates that the index or stock is performing better than the market, and vice versa. Trends in RS can be monitored by MA crossovers, trendline breaks, and so on, in the same way as any other price trend.
Relative strength indicator (RSI) An oscillator measuring the internal momentum of a price series. The RSI is designed to oscillate between 0 and 100. It can be calculated for any time span, but 14 days is the most commonly used period. It should not be confused with comparative RS, which measures relative performance between two different spans.
Secondary distribution or offering The redistribution of a block of stock some time after it has been sold by the issuing company. The transaction is handled off the exchanges by a securities firm or group of firms. The shares are usually offered at a fixed price, which is related to the current market price of the stock.
Security A generic term applied to any freely traded entity, such as a stock, bond, currency, commodity, or market index.
Short covering The process of buying back stock that has been sold short.
Short-interest ratio The ratio of the short position to the average daily trading volume of the month in question. A high short-interest ratio above 1.8 used to be considered bullish, but recent distortions due to the active trading of stock index futures and options have made this a less useful indicator than it once was.
Short position (interest) The total amount of short sales outstanding on a specific exchange at a particular time. The short position is published monthly.
Short selling Short selling is normally a speculative operation undertaken in the belief that the price of the shares will fall. The security is simply sold before it is bought. This process is accomplished in the stock market by borrowing stock from a broker in order to sell shares one does own. Most stock exchanges prohibit the short sale of a security below the price at which the last board lot was traded. This is not the case in the futures markets.
Specialist A member of a stock exchange who acts as a specialist in a listed issue and who is registered with the exchange for that purpose. The member agrees to efficiently execute all orders and, insofar as reasonably practical, to maintain a fair and orderly market in the issue or issues for which he or she is a specialist.
Trendlines Trendlines are constructed by joining a series of descending peaks or ascending troughs. Greater significance is attached to the trendline violation the more times it has been touched, the longer the line remains viable, and the less steep its angle. A trendline break does not necessarily signal a trend reversal, but can also result in a consolidation.
Yield curve The structure of the level of interest rates through various maturities. Usually, the shorter the maturity, the lower the interest rate. Thus, 3-month T-bills usually yield less than 20-year government bonds. The slope of the yield curve relates to the speed, which rises as the maturity increases. In periods of tight money, short-term rates usually yield more than longer-term rates, and the curve is then called an inverse yield curve.
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Technical Analysis Societies
International Federation of Technical Analysts (IFTA) [www.IFTA.org]
(From here links are available to major technical societies around the world.)
Useful Web Sites
Bigcharts.com For commentary, charts, and industry group information.
Wealth-lab.com For charting, discussion, and rankings of automated systems plus unique system testing software.
Quote.Yahoo.com For charting for U.S. stocks international indexes, etc.
Investorlinks.com For multiple links to financial sites
Stockcharts.com Free charting, with special emphasis on sectors. Multitude of indicators and analytical screens chart formats and indicators.
Freestockcharts.com Charting of stocks and a substantial number of indicators. Remembers your favorite chart arrangements, etc.
MarketWatch.com Latest financial news, timely articles, and quotes.
Sentimentrader.com Subscription-based service providing, among other things, a unique collection of sentiment and commitment of traders charts.
Online Interactive Technical Analysis Course
Martin Pring’s Interactive Technical Analysis Course (Pring.com) A 15-hour complete course on technical analysis, including an interactive quiz with each training module.
INDEX
Note: SG indicates pages in Study Guide.
A
Aan, Peter W., 281
Abbott Labs, 418–421
Accumulation patterns, 109, 110
defined, 120
quality of, 133
rectangle, 120
size and depth, 124
Adaptec, 168
ADC Telecom, 163, 164
Aditya Birla Nuvo, 557–558
ADM, 677
Adobe, 169, 170
Advanced Micro Circuit, 391–393
Advance/decline (A/D) line, 561–571, SG:170–171, SG:173
breadth oscillators, 571–573
calculation, 562, 563, SG:169, SG:170, SG:173
daily data, 566–571
global, 702–704, 708–709, SG:206, SG:208
interpretation, 564, SG:169, SG:173
major market averages and, 562–564, 565–566, 682, SG:170, SG:173
Advent Claymore
, 540
Advisory service sentiment, 613–617, SG:182, SG:185
ADX (average directional movement), 335–336, 338–339, SG:98–99, SG:105
AEP Industries, 143, 144
Air transport, 461
Akbank, 410–412
Alberto Culver, 676
Albertson’s, 144, 145
Alergan, 556
Aligent Technology, 100, 101
Altman, Roger, 291
Aluminum, 324–325, 687–690, SG:199, SG:201
Amazon, 385–386, 397, 398
American Business Products, 546
American Century Gold Fund, 737
American Stock Exchange (AMEX), 562
Amex Brokers Index, 459, 605–606
Amrep Ordinary, 104, 105
Andarco Petroleum Ordinary, 106, 107
Andrew Corp., 147–148, 678
Appel, Gerald, 297
Apple, 178, 690
Applied Materials, 678, 679
Approximate one-third retracement requirement, 14
Area gaps, 175, SG:62, SG:64
Arithmetic scales
logarithmic (ratio) scales versus, 81–85, 126–127, SG:51–52, SG:57
point and figure chart, 376
Arms, Richard, 553, 556
Arms Index, 553–554, SG:163, SG:168
Aseer Trading Tourism and Manufacturing, 357, 358
Asian Paints, 2002–2005 moving average, 217
At round numbers, support and resistance zones, 58, SG:28, SG:31
AT&T, 291–292
Australia, 696
Automated trading systems, 713–738, SG:209–213
advantages, 714
combining oscillator with moving average, 724–728
design of successful system, 715–720
disadvantages, 715
guidelines for appraising results, 722
intermarket system, 733–736
margin and, 736–737
signals go with trend, 724
technical principles, 714
trading markets, 720–722
trading range, 720–722
triple indicator system, 728–733
Average directional movement (ADX), 335–336, 338–339, SG:98–99, SG:105