Glossary of Technical Analysis Terms

Acceleration    Chart pattern where the rate of change of share price increases sharply. 

Activity Level    a price level at which notable activity has been observed, i.e. an old support, resistance or breakout level. 

Advances & Declines    a comparison of the number of stocks advancing and the number of stocks declining. See also the Cumulative Advance/Decline Line and Ratio.

Ascending Tops    Any chart patterns where share price peaks become progressively higher. Also known as higher highs.

Base    Usually seen after a large decline – an area of support forms from which a rally may eventually begin. In a nutshell, the stock stops making new lows.

Bar charts    The open, high, low and close of the day are represented in chart form. Also used to determine strength of price movement over the time period in question. The tick on the left side of the bar represents the open and that on the right the close.  Some bars do not have an opening tick.

Bear Confirmed   A term used to describe the current condition of a breadth indicator where the point & figure chart is falling (column O’s) below 70% and has generated a p&f sell (by falling below the previous column of 0’s).

Bear Correction  A term used to describe the current condition of a breadth indicator where the point & figure chart is on a p&f sell but is rising (column X’s) without having moved above 68%.

Bear Alert   A term used to describe the current condition of a breadth indicator where the point & figure chart is falling from above 70% to below 70% without yet generating a p&f sell.

Bear / Bull Trap    Temporary trade above / below existing support / resistance that initially appears to be a price breakout but then fails to follow through, thus ‘trapping’ traders that had taken the signal.

Bearish Resistance Line (point & figure technique) a downtrend drawn at 45 degrees from the top right corner of a rising column of Xs, usually a significant top.

Bellwether    Traditionally the sheep (with a bell on its neck) that led the flock. Now used to describe a closely followed stock that leads the market.

Beta  A measurement of a stock’s volatility relative to a market index. Thus, a stock with a Beta of 1 will generally move 1% for a 1% move in the underlying index. Remember, Beta figures are not set in stone and a stock’s characteristics can change over time.

Blow off Top   The final buying climax at the end of a rally. This takes the form of a spike high, often formed on high volume.

Breakaway Gap   A gap formed on completion of a price pattern that signals a continued move. For example, the break of a resistance level above a base formation on a gap up.

Breakout    A sustained move through a support or resistance line. As a rule of thumb, this should consist of more than one day’s price action. The subsequent move can be powerful. Contrast this with a ‘Bear / Bull trap’, see above.

Bull Alert  A term used to describe the current condition of a breadth indicator where the point & figure chart is rising from below 30% but has not yet generated a p&f bull signal (by rising above the previous column of X’s).

Bull Confirmed Status   A term used to describe the current condition of a breadth indicator where the point & figure chart is rising (column of Xs) and has generated a p&f buy (by rising above the previous column of X’s) and/or is in a column of Xs above 68%.

Bull Correction Status  A term used to describe the current condition of a breadth indicator where the p&f chart is in a bull trend (the last X column went above the one before) but is currently falling (column of Os),  without the X column having yet reached 70%.

Bullish Percentage Indicator    Invented by Chartcraft in the 1940’s, a measure of the percentage of stock exhibiting p&f bullish trends (the current or last X column goes above the preceding X column) within a given industry group or index.

Bullish Support Line  (point & figure technique) an uptrend drawn at 45 degrees from the bottom right corner of a falling column of Os, usually a significant bottom.

Bull Top  A term used to describe the current condition of a breadth indicator where the point & figure chart is falling (column of Os) but above 70%.

Buying Climax  Investors Intelligence defines a buying climax as when within one week, a new 52 week high is made followed by the stock falling and closing below the previous week’s close. This can be an important reversal signal for the stock. Also the total number of buying climaxes across the whole stock market can provide clues as to the timing of market tops.

Candlestick    A Japanese version of the Bar chart where a lower close than open on a day / time period is shaded dark and a higher close day / time period is shaded light.

Charting    The study of historical price patterns / action in order to determine likely future movements. 

Congestion   A period of directionless trade within a range bound by support and resistance levels.

Countertrend    A minor or shorter-term move against the prevailing trend.

Cumulative Advance/Decline Line    This indicator is a non-price measure of the trend of the market. It is a cumulative index of the data for advances and declines described above: the difference between the advances and declines is calculated daily and added/subtracted from/to the cumulative total from previous days.

Divergence    Prices moving in an opposite direction to another indicator. E.g. share price rising but volume decreasing may indicate a potential turning point is on the way. 

Double Bottom / Double Top   Is formed when a market makes a high / low then retreats from it only to test it once more. If support of resistance holds at the high / low level, a turning point may be in prospect. The formation is only completed when the intervening minor low / high is broken on a closing price basis.

Downtrend    A sequence of lower lows and lower highs.

Elliott Wave  A technical analysis technique that applies the ideas of ‘natural law’ to pattern analysis and prediction of financial markets.

Eurobond    a bond (denominated in any currency) issued into the international capital markets. Not to be confused with the Eurobund (another name for the Bund). 

Exhaustion gap  A gap that forms near the end of an extended move. It is a last gap move, exhausting the bullish or bearish sentiment and is followed by a reversal.  The gap is confirmed as an exhaustion gap by a closing price below the lower boundary of the gap (in the case of uptrend exhaustion) or upper boundary (in the case of downtrend exhaustion).

Fibonacci ratios  ratios used by technical analysts to identify likely price targets of trend retracements and extensions. The core ratio is based on the well known Fibonacci mathematical sequence, 1:1:2:3:5:8:13 etc

Gap  A move up / down in a market where the entire trading range of a day / time period is above / below that preceding it. Gaps are classified according to where they appear within a price pattern. The classifications are ‘breakaway’, ‘measuring’, ‘exhaustion’ and ‘common’. See these phrases for their definitions.

Gilts    UK government bonds.

Head and Shoulders Three pronged chart formation resembling a head and two shoulders, where the second peak marks the extreme of the trend. The third peak fails to extend beyond the second. The pattern is completed by a break of the “neckline”, signalling a trend reversal. Also "Inverse Head and Shoulders" at market bottoms.

KDR / Key Day Reversal is often seen at market tops and bottoms. In the case of market tops they are formed by a new price high at the open but with a close below the prior day's close. At bottoms, a new price low is made at the open but the close is above the prior day's close.

Line Chart    Simplest form of chart connecting end of day / time period closes.

Moving Average    The average price of a stock / market over any given (rolling) period of time. Used primarily as an indication of trend, less useful in rangebound markets. Usually plotted at the end of the time period covered but can be centred or shifted as required.

On Balance Volume   OBV is an indicator that adds a period’s volume to a cumulative total when the close is up and subtracts the period’s volume from the cumulative total when the close is down. The cumulative total is plotted as the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation.

Overbought / Oversold   A technical condition that occurs when price is considered to have risen or fallen too far, too fast and is susceptible a pullback. Overbought / oversold indicators (RSI, stochastic) for example) often have values within the range 0 to 100, with overbought territory being defined as above 70 or 80 and oversold defined as below 30 or 20. Remember that overbought is not necessarily the same as being long term bearish. It just means that the stock has risen too far too fast and might be due for a pullback.

Percentage High & Lows    an indicator is calculated by dividing the daily new highs by the sum of daily new highs and daily new lows and displaying the result as a percentage.

Point & Figure    Charting technique where price falls are marked by a ‘O’ and price gains are marked by a ‘X’. The chart is plotted without the time element and can be used as a ’noise reduction’ system. For more information see the "guide to point and figure" in the Investors Intelligence University.

Relative Performance    A comparison between a share and its peers or underlying market made to determine over / under performance. Not be confused with RSI (see below). 

Relative Strength    A comparison of a share with a peer group or market index, made to determine whether the share outperforms or underperforms the peer group or market index. This is achieved by dividing the closing share price by the closing sector or market index value for each day and plotting the results as a line. Not be confused with RSI (see below).

Relative Strength Indicator (RSI) (new)  A momentum indicator, used to determine whether a market is overbought or oversold.  It is quoted on a scale of 0–100, with readings over 70 usually seen as overbought and readings under 30 seen as oversold. Its calculation is a comparison of points gained on up days with points lost on down days over a given number of previous price bars (usually 14 periods).

Resistance    A level where sellers are found. Usually plotted as a horizontal line touching previous highs. Can appear at psychological levels, i.e. big round numbers such as $10 or 10,000.

Retracement (Pullback)  Temporary fall / rise in a market against prevailing trend or to unwind overbought (o/b) or oversold (o/s) situation. Less dramatic than reversal.

Rounding Bottom    A chart pattern showing gradual base formation and the turn to an uptrend. A good long-term base formation. See also Rounding Top. 

Runaway or measuring gap A gap that forms in the direction of an existing trend. The gap is called a measuring gap as these are seen to form midway through the eventual extent of the trend.

Sector Sum Proprietary indicator based on the sum of the scores of industry group bullish% charts.  

Selling Climax  A climax occurs when a new 52 week low is made and the stock loses that extreme level and closes above the previous week’s close. An important reversal signal.

Support   Psychological, fundamental or technical level that limits selling in a stock / market. Often described as a point where there are more buyers than sellers. Can appear as sideways support (bases or ranging markets) or uptrend support (rising markets).

   

Technical Analysis   The study of historical price action to determine future movements, usually with the use of charts.

TIR Composite    An Investors Intelligence indicator. A short-term timing tool comprising of 29 market indicators.

Top Formation     Chart pattern indicating the end of an uptrend. Double tops, rounding tops and head and shoulder formations are examples.
 

Trend    The overall direction of a market or stock ignoring minor short-term fluctuations e.g. a bull / bear market. Identification of this is the most important concept in Technical Analysis. See Counter-Trend.

Treasuries   US Treasury bonds. The most commonly traded are the 2, 5 and 10 year. The 30-year issue is known as the “long bond”.

Trendline   A line connecting two or more points on the chart, defining the trend over the chosen timeframe. A rising trendline connects the low (within a chosen timeframe) to later lows that occur before the highest price within that timeframe and without cutting through previous price plots.

Trough is a term used to indicate a market bottom.

Value Line    a well known US investor service and producer of the Value line index.

Volatility    The frequency and rate of change of an instrument. Often used as a theoretical measurement of risk. Volatility can be calculated statistically. Implied volatility is that given by the prices of options.

V-Reversal     Sudden rally, over 1-3 days, seen after a sharp fall. Can be a base formation. An example of this occurred in several markets in September 2001.

Weekly Insider Action  Investors Intelligence studies the current action (buy/sell) of Insiders (company directors) for all shares within a particular industry group and compares it to previous buy/sell action.  The rationale for studying insider action is that insiders are mostly correct in their trading decisions but act well before the price moves.

Weekly Insider Sales/Purchase Ratio    Calculated from Insider data as described above. Higher levels indicate more sellers than buyers and vice versa.

Weekly Buy/Sell Climax Ratio    Investors Intelligence publishes the number of shares experiencing buying and selling climaxes. The ratio is calculated from the two figures. See Buying/Selling Climaxes.