Copy of Technical Analysis PDF

8/3/2019 Copy of Technical Analysis PDF

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TECHNICAL ANALYSIS

AMIT AGARWALFounder & Mentor

B E N G R A H A M S C H O O L O F F I N A N C E

www.ben-school .com


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1. What is Technical analysis?

- Technical analysis is the study of stock price behavior by analyzing its chart.

- Technical analysis is done to uncover trends in stock and market in general.

- Technical analysis helps in taking advantage of trends. With this theinvestors have the opportunity to enter as well as hold profitable positions instocks on the move.

2. Fundamental Analysis vs. Technical Analysis

- Fundamental analysis seeks to determine a future stock price by understanding and measuring the objective value of equity. In contrast thestudy of stock charts, known as technical analysis, is based on the belief that

the past action of the market itself will determine the future course of prices.- Technical analysts try to forecast short term shifts in supply and demand that

will affect the market price of a security and ignore any firm related, oreconomy related information as fundamentalists do.

- Technical analysis is useful for only short term investors, while fundamentalanalysis is useful for long term investors.

- A fundamentalist believes that long term security values can be gauged by studying the main factors related to the firm, the industry and the economy.

While on the other hand a technical analyst works on the premise that shortterm price movements can be predicted on the basis of price-volume study,chart patterns of individual stocks and other technical market indicators

The above comparisons are given to better understand the role of each type of analysis, but that doesnt mean that they are mutually exclusive and should beused in isolation only. Rather these two fields of analysis compliment each otherand can be used together to achieve better results.

One must go for a share which is fundamentally strong and then determine thetiming of your buying or selling the shares on the basis of technical analysis.

To understand this concept of using both these analysis together, lets considerthe following example:

Say a stock named XYZ is available at a current market price of 100. By fundamental analysis you arrive at fair value of XYZ at 70, at which this stock would be a considered as good investment. Now suppose the stock startedcorrecting after 2 months and came down to the price of 70.


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Now if you understand the technical analysis as well then you wont rush to buy the stock just because it has come down to 70. Rather you will do a quick technical analysis to check whether there is some more downside left in the stock or not. If the technical indicators suggest that there is some more momentum left

in the stock on the negative side then you would wait for some more time andonly start buying the stock at a price where the technical indicators startsuggesting that the selling pressure has relatively come down and there is notmuch downside left in the stock from that level or price.

Same technique can be used while selling the stocks you own. Technical analysishelps you in getting more return out of your investment just by utilizing themomentum in either direction.

In summary when technical analysis is used in conjunction with fundamentalanalysis the return on your investment can be maximized.

3. Evolution of Technical Analysis

Technical analysis was conceptualized by Dow Jones, the editor of wall streetJournal. While recording price movements of various securities, he observed thatmost stocks move in tandem with the market, going up when the market goes upand vice versa.

In order to interpret market behavior, Dow constructed two indices called Dow Jones Industrial Average (DJIA), and Dow Jones Transportation average (DJTA).He proposed a theory called Dow Theory which is very popular today andalmost technical analysis revolves around this theory.

4. Rationale of Technical Analysis

Technical analysis believes that it is possible to forecast the future price of a share by looking at the past price movements. Their main assumptions are:

1. The market price of a security is determined solely by supply and demand. Any shift in the supply demand relationship, can be detected sooner orlater in the action of the market

2. Supply and demand are governed by numerous factors relied upon by fundamentalists, as well as opinions, moods guesses and blind necessities.

3. Disregarding minor price movements stock prices tend to move in trendthat persists for an appreciable length of time.


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4. Some chart patterns tend to recur and their recurring prices can be used toforecast the price movement.

5. DOW THEORY

The Dow Theory says that the market has three simultaneous movements. Themost important movement is called the primary trend, which is a broadupward or downward movement lasting usually for few years.

A secondary movement is called technical correction. This is a muchshorter in duration and is opposite in direction to the primary trend. Actually atechnical correction is the intermediate reaction to the primary trend such assudden decline in bull market or a sudden rise in bear market. Such interruptioncan last for 3 weeks to 3 months and usually retraces 1/3 to 2/3 of the previousadvance in bull market or 1/3 to 2/3 of the previous decline in bear market.

I addition to above two trend there is another trend known as Tertiary trend which is due to daily fluctuation, and is not considered important by theDow Theory.

As mentioned earlier, the Dow Theory seeks to detect the primary trendand assumes that the stock prices have a momentum of their own by which pricestend to maintain the same direction, once it achieves a primary trend.

The Dow Theory says that if the market index movement is such that allsuccessive peaks are ascending and all successive bottoms are also ascending,then there exists a primary up trend. Conversely, if the successive peaks andsuccessive bottoms show a downward slide, it signals a major downtrend.

6. Technical analysis tools

6.1. Moving averages

Among the most popular technical indicators, moving averages are used to gaugethe direction of the current trend. Every type of moving average is amathematical result that is calculated by averaging a number of past data points.Once determined, the resulting average is then plotted onto a chart in order toallow traders to look at smoothed data rather than focusing on the day-to-day price fluctuations that are inherent in all financial markets. The simplest form of a moving average, appropriately known as a simple moving average (SMA), iscalculated by taking the arithmetic mean of a given set of values. For example, tocalculate a basic 10-day moving average you would add up the closing prices fromthe past 10 days and then divide the result by 10. In Figure 1, the sum of the


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prices for the past 10 days (110) is divided by the number of days (10) to arrive atthe 10-day average. If a trader wishes to see a 50-day average instead, the sametype of calculation would be made, but it would include the prices over the past50 days. The resulting average below (11) takes into account the past 10 datapoints in order to give traders an idea of how an asset is priced relative to the past

10 days.

Perhaps you're wondering why technical traders call this tool a "moving" averageand not just a regular mean. The answer is that as new values become available,the oldest data points must be dropped from the set and new data points mustcome in to replace them. Thus, the data set is constantly "moving" to account fornew data as it becomes available. This method of calculation ensures that only thecurrent information is being accounted for. In Figure 2, once the new value of 5 isadded to the set, the red box (representing the past 10 data points) moves to theright and the last value of 15 is dropped from the calculation. Because therelatively small value of 5 replaces the high value of 15, you would expect to seethe average of the data set decrease, which it does, in this case from 11 to 10.

Once the values of the MA have been calculated, they are plotted onto a chart andthen connected to create a moving average line. As you can see in the followingFigure, it is possible to add more than one moving average to any chart by adjusting the number of time periods used in the calculation. The red line issimply the average price over the past 50 days, while the blue line is the averageprice over the past 100 days.


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Chartists usually plot two moving average lines to their chart, one for a shorterperiod of time (for example 50 days or 100 days) and other for a longer duration

(ex 200 days). Whenever the daily price line cuts the moving average line,technical analysts try to interpret this penetration.

The simple moving average is extremely popular among traders, but like alltechnical indicators, it does have its critics. Many individuals argue that theusefulness of the SMA is limited because each point in the data series is weightedthe same, regardless of where it occurs in the sequence. Critics argue that themost recent data is more significant than the older data and should have a greaterinfluence on the final result. In response to this criticism, traders started to givemore weight to recent data, which has since led to the invention of ExponentialMoving averages (EMA). Learning the somewhat complicated equation for

calculating an EMA may be unnecessary for many traders, since nearly allcharting packages do the calculations for you.

The most common time periods used in moving averages are 15, 20, 30, 50, 100and 200 days.


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Interpretation of penetration of MA lines:

The empirical rules for buying are:

1. If the moving average line moves upward and the actual price line aftercutting the moving average line from below rises above it, it is a signal of a bullish market and an indication to buy.

2. A buy signal is further confirmed when the short term moving average (say 100 DMA) crosses the long term moving average (say 200 DMA) from below.

3. If the moving average line moves downward and cuts the actual line, whichlies below the moving average line, then it gives a bearish indication with a

sell signal4. A sell signal is further confirmed when the long term moving averages

crosses the short terms moving average line from below.

6.2. Price-volume indicators (Momentum indicators)

- Price and volume are very closely related. If price movement is supported by high volume it confirms the momentum in that direction

- Price rise with increase in volume indicates bullish trend in the stock

- Price rise with decreasing volume indicates lack of interest in buying at thehigher price and is thus bearish indicator

- Price fall with increasing volume indicates bearish sentiment on the stock

- Price fall with decreasing volume indicates lesser number of sellers at lowerlevel and is thus a bullish indicator


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6.3. New High & New low indicator

A rising market should normally view an expanding number of stockshitting new high prices and decreasing new low prices

Conversely, a declining market is usually accompanied by an increasingnumber of new lows and decreasing number of new highs.

Technical analysts prefer to buy stocks with hit 52wk High and sell stocks which hit 52wk Low

6.4. Support and resistances

Any chart of a stock price or market index will show that the rise or fall is notuniform, and is rather characterized by a wave like pattern with successive peaksand troughs. When a stock price (or market index) touches a certain level andthen drops, the peak is called resistance level. Conversely, when the Price aftersliding to a trough bounces back, the bottom level of the trough is called support.

These support and resistance levels are seen as important in terms of marketpsychology and supply and demand. Support and resistance levels are the levelsat which a lot of traders are willing to buy the stock (in the case of a support) orsell it (in the case of resistance). When these trendlines are broken, the supply and demand and the psychology behind the stock's movements is thought tohave shifted, in which case new levels of support and resistance will likely beestablished.


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Round Numbers and Support & Resistance

One type of universal support and resistance that tends to be seen across a largenumber of securities is round numbers. Round numbers like 10, 20, 35, 50, 100

and 1,000 tend be important in support and resistance levels because they oftenrepresent the major psychological turning points at which many traders willmake buy or sell decisions. Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as $50, whichmakes it more difficult for shares to fall below the level. On the other hand,sellers start to sell off a stock as it moves toward a round number peak, making itdifficult to move past this upper level as well. It is the increased buying andselling pressure at these levels that makes them important points of support andresistance and, in many cases, major psychological points as well.

The Importance of Support and Resistance

Support and resistance analysis is an important part of trends because it can beused to make trading decisions and identify when a trend is reversing. Forexample, if a trader identifies an important level of resistance that has beentested several times but never broken, he or she may decide to take profits as thesecurity moves toward this point because it is unlikely that it will move past thislevel.

Support and resistance levels both test and confirm trends and need to bemonitored by anyone who uses technical analysis. As long as the price of theshare remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if pricesmoved above the resistance levels of an upward trending channel, the trend haveaccelerated, not reversed. This means that the price appreciation is expected to befaster than it was in the channel. Being aware of these important support andresistance points should affect the way that you trade a stock. Traders shouldavoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near asupport or resistance level, it is important that you follow this simple rule: do notplace orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with itinstead. So if you're bullish on a stock that is moving toward an important

support level, do not place the trade at the support level. Instead, place it abovethe support level, but within a few points. On the other hand, if you are placingstops or short selling, set up your trade price at or below the level of support.


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6.5. Chart patterns

A chart pattern is a distinct formation on a stock chart that creates a tradingsignal, or a sign of future price movements. Chartists use these patterns to

identify current trends and trend reversals and to trigger buy and sell signals.There are a number of chart patterns and empirical rules for predicting thefuture trend. Following are discussed some of the most common and trustedchart patterns followed by technical analysts all over the world.

Head & Shoulder pattern

This is the most important pattern that indicates the reversal of the price trend.There are two versions of this pattern, Head & Shoulders Top (shown on theleft) and Head & Shoulder bottom (shown on the right) also known asinverted Head & Shoulder.There are four main parts to both of these head and shoulder patterns. Twoshoulders, a head and a neck line. The fall below the neckline in case of Head &Shoulder top pattern (shown in the left figure) indicates the reversal of theuptrend. Similarly rise above the neckline of the inverted Head & Shoulderpattern (as shown in the right figure) indicates the reversal of the down trend.

Double top double bottom

This is another pattern which signals trend reversal. Double top as can be seen inthe picture on the left is formed when a stock attempts to surpass a price level onthe upside twice but could not and the price heads lower. Similarly double bottomis formed when a stock attempts to fall below a certain price level twice but couldnot and the price heads higher.


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Channel formation (trend formation)

A channel is a uniformly changing tops and bottoms. During an upward slopingchannel the stock price makes higher tops and higher bottoms as shown in theleft figure, where as in downward sloping channel the stock price makes lowertops and lower bottoms. So if an upward sloping channel trend is confirmed onecan take a position in the stock when the stock price takes a correction. On theother hand if a downward sloping channel is confirmed one can sell the stock onrise.

Relative Strength Index - RSI

A technical momentum indicator that compares the magnitude of recent gains torecent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:

RSI = 100 - 100/(1 + RS*)

*Where RS = Average of x days' up closes / Average of x days' down closes.


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As you can see from the chart, the RSI ranges from 0 to 100. An asset is deemedto be overbought once the RSI approaches the 70 level, meaning that it may begetting overvalued and is a good candidate for a pullback. Likewise, if the RSIapproaches 30, it is an indication that the asset may be getting oversold andtherefore likely to become undervalued.

A trader using RSI should be aware that large surges and drops in the price of anasset will affect the RSI by creating false buy or sell signals. The RSI is best usedas a valuable complement to other stock-picking tools.


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EXAMPLES:

Federal Bank

Investors with medium-term perspective can consider buying the stock of FederalBank (Rs 445.3). The stock bottomed out in March 2009, taking support from itslong-term base in the range between Rs 110 and Rs 120.

Since then, it has been on a long-term uptrend forming higher peaks and troughs.Moreover, in February 2011, the stock's medium-term down trend came to anend as the stock took support in the band between Rs 330 and Rs 340.

Subsequently, the stock changed direction, triggered by positive divergence indaily relative strength index and moving average convergence divergenceindicator.

The stock conclusively broke through its immediate key resistance as well as 200-day moving average around Rs 390 by rallying more than 8 per cent, backed withgood volumes in the last week of March. In the previous week, the stock advanced5 per cent with good volumes reinforcing the bullish momentum.

It has retraced more than 61.8 per cent fibonacci retracement level of its priordowntrend and the stock appears to have resumed its primary trend that is up.The stock is trading well above its 21 and 200-day moving averages.

The 14-day relative strength index is featuring in the bullish zone and the weekly RSI has entered in to this zone from the neutral region. Daily MACD is inchinghigher in line with the stock and weekly MACD has signalled a buy.

We are bullish on Federal Bank from a medium-term perspective. We believe thatits ongoing up move has the potential of progressing further until it reaches ourmedium-term price target of Rs 520, with a minor pause around its previous of


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Rs 501. Investors with medium-term perspective can consider buying the stock with stop-loss at Rs 405.

Hindustan Oil Exploration

We recommend a sell in the stock of Hindustan Oil Exploration from a short-term perspective. It is evident from the charts of the stock that after findingsupport around Rs 160 between February and March, it started moving up wards.The stock accelerated higher in a short span of two weeks and encounteredsignificant long-term resistance at Rs 230 on April 4. This resistance almostcoincides with the 50 per cent fibonacci retracement level of the stock's priordown move from November 2010 peak of Rs 293.

However, after testing this resistance for seven trading sessions, the stock'suptrend grow weaker and on Monday it tumbled five per cent. With this decline,the stock has breached its 200-day moving average. Moreover, this reversal has

been triggered by negative divergence in the daily relative strength index. Thedaily RSI has entered in the neutral region from the bullish zone and weekly RSIis sloping in the neutral region. We are bearish on the stock from a short-termhorizon. We anticipate it to decline further until it reaches our price target of Rs210 or Rs 201 in the upcoming trading session. Traders with short-termperspective can consider selling the stock with stop-loss at Rs 221.


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Technical Analysis Glossary

Accumulation: Process by which, over a period of time, a large or excess supply of stock or futures contracts is absorbed by increasing demand from buyers.

Generally, there is little price action until the sellers have been exhausted. Then buyers dominate and price tends to rise.

Advance/Decline Ratio: The number of stocks advancing divided by thenumber of stocks declining over a particular time period. See Breadth Ratio.

Ascending Triangle (or Rising Triangle): A chart pattern containing aseries of lows, each successively higher than the last, and a series of highs that areat approximately the same level. It is considered a bullish formation when volume increases on the ascending legs. When a breakout through the level of thehighs is made, the pattern is completed.

Apex: The point of intersection of two trendlines. A new trend may develop asprices approach the intersection.

Bar Charts: Graphical displays of the trading in a security, bond, index, optionor average characterized by vertical lines connecting the high and low prices for aspecific period (day, week, month, year). The close of the period is marked with ashort crossbar on the vertical line. Price or level is scaled arithmetically or semi-logarithmically on the vertical axis. Time is marked on the horizontal axis at the bottom. Also at the bottom, the volume of trading for each period is indicated vertically as a histogram.

Base: This chart pattern is formed after a decline by a considerable amount of trading occurring within a relatively narrow price range. The formation iscompleted when an upside breakout occurs.

Bear Market: When the longer-term trend of security prices is down. When viewed within the four-year cycle, a bear market can often last a year or more.

Bear Trap: A false move to the downside that does not start a new downtrend. Itis the final reaction prior to an advance, hence "trapping the bears." Opposite of Bull Trap .

Bellwether: A stock viewed as a leader in the market, e.g. "as GM goes, so goesthe market." Also a bellwether or benchmark issue in the cash bond market, e.g.the most recently auctioned 10-year bond.

Blow Off: A sharp price rise, accompanied by extraordinary volume; usually theculmination of an extended advance, leading to a sharp reaction.

Bottom: The low point in a down move.


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Bottom Reversal: The change in the direction of price movement/trend whichoccurs at stock market bottoms.

Breadth: A measurement calculated by comparing the number of advancing

stocks to the number declining. The more net advances seen in an up market, thegreater its breadth; vice versa for down markets.

Breadth Ratio: Computed by dividing the number of advances by the numberof declines over a given time period, usually a day or a week.

Breakaway Gap: Usually, a high-volume move out of a consolidation pattern.The strength of buying is sufficient to cause the security to jump to higher levels without trading at the intervening prices. A strong, sustained up move isnormally indicated.

Breakdown: A price drop below a significant support level or out of aconsolidation pattern. Caused by sellers overwhelming buyers, it usually signalseither the beginning or the resumption of a downtrend.

Breakout: An upward move exceeding a previously recorded high, resistancelevel, or through a bullish trendline or some other criteria, often on high volume.

Bull Trap: Occurs when in a bear market prices suddenly rise, luring in bullstaking long positions before resuming the downtrend.

Candlestick Charts: A charting method developed in Japan in the 1700s. Thehigh and low for the time period are described as shadow and plotted as a singleline. The price range between the open and the close is plotted as a box orrectangle on the line. If the market closes above the open, the body of the box is white or empty. If the close is below the open, the body of the box or rectangle is black.

Channels: The area between two parallel trendlines, the upper trendlineconnecting most of the important price peaks or closes and the lower trendlineconnecting the important lows or closes. Price reversals are expected to occur when prices approach either boundary.

Charts: Graphical representations of price, volume and/or other data over aperiod of time. Commonly used in technical analysis are Bar Charts, Line Charts,Point and Figure Charts, Candlestick Charts and Market Profile.

Climax or Selling Climax: The culmination or end of a protracted period of selling, characterized by high volume, forced margin selling, extreme degrees of negative market breadth (also in prior years a late ticker tape)--and panic. A climax marks the end of one of the late phases of a decline with an abruptreversal. While the market may again retreat--sometimes even to new lows--the


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climax is an obvious milepost to the beginning of the end of the bear market.

Confirmation: Occurs when the action of one indicator corroborates the actionof another. The implication is confidence that the trend will continue. The lack of such confirmation is often called divergence.

Congestion Area: A price area where previous heavy volume trading hasoccurred. It is considered a likely area to find support or resistance in the future.

Consolidation: A generally lateral period of trading in terms of price. It isusually an interruption of an ongoing uptrend or downtrend, as opposed to areversal type of pattern.

Continuation Pattern: A consolidation that temporarily interrupts a rally ordecline and sets the stage for another move in the same direction.

Correction: A price swing opposite in direction to that of the main trend. Majorcorrections can generally be one-third to two-thirds of the previous gain ordecline.

Count: A point and figure technique used to estimate a price objective or target--up or down. Calculations are based on the extent of prior sideways movements.

Demand: Buying interest from investors. Theoretically, creates support.

Descending Triangle: The converse or opposite of an Ascending Triangle. A continuation pattern with bearish implications. Volume is normally higher at thelows and decreases as the upper, downsloping trendline is approached. A break below the lower horizontal line of the pattern, on increased volume, completesthe pattern and reaffirms the downtrend in progress.

Distribution: The process by which demand is more than compensated for by expanding supply. Over a period of time, increasing supply has a negative effecton the price of a stock. Stocks under distribution are often signaled by broadening, rounding, or double or triple tops.

Divergence: An action by one indicator moving, not in conjunction oragreement with another indicator, but rather counter to or short of it. Such nonconfirmations often signal reversals.

Double Bottom: A reversal type chart pattern distinguished by two successivedeclines, both terminating at approximately the same level. When completed,accomplished by a rise on volume above the high between the two lows, thepattern often resembles the letter W .

Double Top: A reversal type chart pattern--the obverse of the Double Bottom-- which resembles the letter M .


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Dow Theory: A description of market behavior, invented by Charles Dow, which divided price moves into three types of trends: major (lasting from monthsto years), intermediate (weeks to months) and minor (days to weeks). A primary corollary is that of mutual confirmation of moves by both the Industrial Average

and the Transportation Average, i.e. a significant move by one average must beconfirmed by a similar move in the other. This action provides the theory with thesignals.

Downside Volume: A daily, weekly or monthly summary of the volumetransacted in all stocks which fell in the period. More loosely, down volumealludes to heavy volume during a period of generally declining prices.

Elliott Wave Theory: A theory of market behavior published by Ralph NelsonElliott in the 1930s. According to the theory, the stock market follows a pattern of five waves up and three waves down to form a complete cycle.

Fibonacci Ratio: The relationship between two numbers in the fibonaccisequence. The sequence for the first three numbers is 0.618, 1.0, and 1.618. Ingeneral terms, the fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.

Formation: A recognized, technically significant chart pattern. While every chart pattern is unique, each general type tends to yield similar results.

Head and Shoulders Top: A pattern characterized by a series of three peaks,the first and third being lower than the middle. Volume, heavy on the first peak,declines on the next two. Completion is marked by the breaking of the "neckline"(an extension of the line connecting the troughs between the three peaks)accompanied by heavy volume. An inverse head and shoulders is the samepattern upside down and volume increases through the pattern.

Index: An average or other technical device, usually numerical, used to monitoror predict market moves. A broadly defined and used term, it is not necessarily anindex in strict mathematical definition.

Indicators: A subset of market measuring tools (indexes) used specifically formonitoring and forecasting, e.g. Confidence Index or Specialists' Short SalesRatio. Indexes frequently use benchmarks or thresholds as signals of possibleimpending change in market outlook.

Intermediate Term: Refers to a period of time often measured in terms of weeks or months.

Line Formation: A sideways chart pattern that unfolds within a very narrow price range. The price swings are so limited, a line can often be drawn across thechart covering the prices, hence the name. The pattern indicates a tight balance


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between supply and demand and thus the direction of the eventual breakout ismade more meaningful as an indicator of the direction of the next move.

Liquidity: A general term used to indicate how easily transactions can beexecuted at or near a given price in a given issue or market. It often relates to the

number of dollars required to effect a given price change. A liquid stock canabsorb more buying (selling) before a significant price change occurs than can anilliquid stock.

Momentum: The strength or sustainability of a market move as measured by both volume and price. Moving average based indicators are often used, as arecomparisons with the levels of previous time period.

Most Active Stocks: A list of those stocks which have traded the most sharesduring the period, usually the day of the week. The list is a guide to those stocksor groups which are attracting the most attention. The average price of the listcan be a guide to whether conversative or speculative issues are gaining ininterest.

Moving Average: A continuous smoothing technique computed by averaging aseries of numbers (price, volume, etc.) progressively over a period of time. Theseries is often a week, a month or a quarter in length and is computed anew aseach day or week goes by. It is often then plotted on a chart with the raw data foranalysis purposes.

Overbought: A market condition wherein a stock, group or market has recently extended or exceeded its normal range of movement on the upside. Oftenaccompanied by increased volume and/or a string of unbroken up days. Thecondition implies a near term reversal is imminent.

Oversold: The reverse of overbought. For the market as a whole, theseconditions are often identified by a large number of net Declines (or Advances)for the period, high on balance volume and/or large momentum calculations.Extreme situations can continue for extended periods of time before the eventualreversal occurs.

Pattern: A distinctive formation created on a chart by the up and downmovement of prices. For example, head and shoulders, triangle, and double top.

Pennant: A brief triangular consolidation within a steep advance havinggenerally short-term implications. For inverse, see Flag .

Pivot Point: The sum of the high, low and closing price divided by three. Thefollowing trading session, if the market falls below the pivot point, it could act asresistance. Accordingly, if the market rises above the pivot point it may act assupport.


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50% Principle (one-half retracement): After a sustained move in price, thisprinciple holds that a normal correction can be expected to retrace one-half totwo-thirds of the advance (or decline) before resuming the main trend.

Point and Figure Chart: A method of charting in which only price changes (of

a specific unit) and the direction of change are the variables. Time and volumedimensions are omitted. Price data are plotted on graph paper. New columns are begun when a reversal by at least one unite can be recorded.

Pullback: A relatively rapid return, after a breakout, to the boundary area of thepreceding pattern. It is usually characterized by light volume.

Rally or Reaction: Price movement in the opposite direction to a stock'soverall trend.

Relative Strength: Price performance of a stock or group of stocks compared toa given norm, such as the Standard & Poor's 500 or the Dow Jones industrialaverage. A stock moving up 20% when the norm moves only 10% is considered tohave good relative strength.

Resistance: A supply of stock waiting to be sold at a price above the currentlevel. Significant trading at that level has previously created a pattern whichsuggests there would be resistance to the price moving significantly above thatlevel without a great deal of stock changing hands.

Reversal: A shift in the direction of price movement caused by a change indemand and/or supply. Generally the longer the reversal pattern takes todevelop, the more serious its implications.

Sentiment Indicators: Indicators which attempt to gauge individual investorand/or professional attitudes toward the market. Monitoring the degree of optimism or pessimism present is a major tenet of technical analysis. Twoexamples are the amount of shorting being done and the number of advisory services which are bearish or bullish.

Speculation Index: Historically, the ratio of the American Stock Exchange volume to that of the New York Stock Exchange. When the American Exchange volume is relatively high, it is thought to be a sign of increased speculation because of the large number of low-priced issues which trade there. Excessively high levels in this index have occurred near many market tops.

Spike: A chart pattern revealing a sudden or extreme move to a new high or low.These formations are followed by an equally extreme move in the oppositedirection.

Support Level: An area or price level where a price decline may be expected to be halted (or to slow) by an increase in demand. Opposite of resistance.


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Test: The movement of a stock or an average toward a previously establishedsupport or resistance level. It will respect the area reinforcing the support orresistance available there, or penetrate and initiate a new technical event such asa breakout.

Three Percent Rule: This is often used as a guideline to determine if a breakout or breakdown is valid. The price should move at least 3% above or below the respective level for the move to be regarded as valid.

Top or Tops: A period of distribution. The high point of an upward move or oneof several recognized reversal patterns.

Trend: A move in price either upward or downward, characterized by a series of higher lows and higher highs (uptrends) or lower highs and lower lows(downtrend).

Trendline: A line which is drawn through successive maximum pricemovements, i.e., through a series of two or more successively lower peaks(downtrend) or successively higher troughs (uptrend). Trendlines can also bedrawn through the close. The more instances of contact, the more the line isreinforced.

Triangle: Narrowing of a trading range formed by a series of lower highs as wellas higher lows. The pattern is completed by an often sharp high volume break through either of the converging trendlines.

Triple Top: Similar to a double top, though much rarer, but with three peaksinstead of two. Volume on each successive peak is usually less than on theprevious peak. The pattern is completed when the price declines below thesecond reaction low.

V Pattern: A price pattern resembling the letter V, characterized by a sharpdownward move followed immediately by a rapid upward progression, which isoften accompanied by heavier volume.

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