Financial markets glossary
Below are some of the terms used in the interpretation and analysis of financial markets trading.
Process by which, over a period of time, a large or excess supply of 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.
The number of stocks or bonds or commodities which have advanced in a given time period compared to the number which have declined. The difference (breadth) is considered important in gauging the strength or weakness of the market. Daily observations are the most common.
The number of stocks advancing divided by the number of stocks declining over a particular time period. See Breadth Ratio.
Each day's declining issues are subtracted from the day's advancing issues. The difference is added to (subtracted from if negative) a running total or sum. See Breadth.
The point of intersection of two trendlines. A new trend may develop as prices approach the intersection.
Ascending Triangle (or Rising Triangle):
A chart pattern containing a series of lows, each successively higher than the last, and a series of highs that are at approximately the same level. It is considered a bullish formation when volume increases on the ascending legs. When a breakout through the level of the highs is made, the pattern is completed.
Average Balance Volume Line:
A simple moving average applied to the tick volume based on a comparison of the current and previous period's closes. See also Tick Volume.
Optimizing a moving average or trading strategy on historical data.
Graphical displays of the trading in a security, bond, index, option or average characterized by vertical lines connecting the high and low prices for a specific period (day, week, month, year). The close of the period is marked with a short 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.
This chart pattern is formed after a decline by a considerable amount of trading occurring within a relatively narrow price range. The formation is completed 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.
A false move to the downside that does not start a new downtrend. It is the final reaction prior to an advance, hence "trapping the bears." Opposite of Bull Trap.
A sharp price rise, accompanied by extraordinary volume; usually the culmination of an extended advance, leading to a sharp reaction.
The low point in a down move. Bottom Reversal: The change in the direction of price movement/trend which occurs at market bottoms.
A measurement calculated by comparing the number of advancing stocks to the number declining. The more net advances seen in an up market, the greater its breadth; vice versa for down markets.
Computed by dividing the number of advances by the number of declines over a given time period, usually a day or a week.
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 is normally indicated.
A price drop below a significant support level or out of a consolidation pattern. Caused by sellers overwhelming buyers, it usually signals either the beginning or the resumption of a downtrend.
An upward move exceeding a previously recorded high, resistance level, or through a bullish trendline or some other criteria, often on high volume.
A reversal pattern marked by a succession of at least three generally higher highs alternating with successively lower lows. Occurs after a notable price rise. The pattern is completed by a third breakdown, normally to a significantly lower low.
Occurs when in a bear market prices suddenly rise, luring in bulls taking long positions before resuming the downtrend.
A charting method developed in Japan in the 1700s. The high and low for the time period are described as shadow and plotted as a single line. The price range between the open and the close is plotted as a box or rectangle 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.
The area between two parallel trendlines, the upper trendline connecting most of the important price peaks or closes and the lower trendline connecting the important lows or closes. Price reversals are expected to occur when prices approach either boundary.
Graphical representations of price, volume and/or other data over a period of time. Commonly used in technical analysis are Bar Charts, Line Charts, Point and Figure Charts, Candlestick Charts and Market Profile.
A hesitation in a trend that usually leads to a reaction. Volume is relatively high with little price progress.
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 abrupt reversal. While the market may again retreat, sometimes even to new lows, the climax is an obvious milepost to the beginning of the end of the bear market.
Occurs when the action of one indicator corroborates the action of another. The implication is confidence that the trend will continue. The lack of such confirmation is often called divergence.
A price area where previous heavy volume trading has occurred. It is considered a likely area to find support or resistance in the future.
A generally lateral period of trading in terms of price. It is usually an interruption of an ongoing uptrend or downtrend, as opposed to a reversal type of pattern.
A consolidation that temporarily interrupts a rally or decline and sets the stage for another move in the same direction.
A price swing opposite in direction to that of the main trend. Major corrections can generally be one-third to two-thirds of the previous gain or decline.
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.
Buying interest from investors. Theoretically, creates support.
The converse or opposite of an Ascending Triangle. A continuation pattern with bearish implications. Volume is normally higher at the lows and decreases as the upper, downsloping trendline is approached. A break below the lower horizontal line of the pattern, on increased volume, completes the pattern and reaffirms the downtrend in progress.
The process by which demand is more than compensated for by expanding supply. Over a period of time, increasing supply has a negative effect on the price of a stock. Stocks under distribution are often signaled by broadening, rounding, or double or triple tops.
An action by one indicator moving, not in conjunction or agreement with another indicator, but rather counter to or short of it. Such nonconfirmations often signal reversals.
A reversal type chart pattern distinguished by two successive declines, both terminating at approximately the same level. When completed, accomplished by a rise on volume above the high between the two lows, the pattern often resembles the letter W.
A reversal type chart pattern--the obverse of the Double Bottom--which resembles the letter M.
A description of market behavior, invented by Charles Dow, which divided price moves into three types of trends: major (lasting from months to 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 be confirmed by a similar move in the other. This action provides the theory with the signals.
A daily, weekly or monthly summary of the volume transacted in all stocks which fell in the period. More loosely, down volume alludes to heavy volume during a period of generally declining prices.
Elliott Wave Theory:
A theory of market behavior published by Ralph Nelson Elliott in the 1930s. According to the theory, the market follows a pattern of five waves up and three waves down to form a complete cycle.
The relationship between two numbers in the fibonacci sequence. The sequence for the first three numbers is 0.618, 1.0, and 1.618. In general terms, the fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.
A brief consolidation pattern within a steep advance (or decline) generally in the form of a compact rectangle, tilted against the prevailing trend, and resembling a flag. Similar to a pennant, triangle or wedge, it is a continuation type pattern.
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 same pattern upside down and volume increases through the pattern.
An average or other technical device, usually numerical, used to monitor or predict market moves. A broadly defined and used term, it is not necessarily an index in strict mathematical definition.
A subset of market measuring tools (indexes) used specifically for monitoring and forecasting, e.g. Confidence Index or Specialists' Short Sales Ratio. Indexes frequently use benchmarks or thresholds as signals of possible impending change in market outlook.
A day in which the total range of price is within the range of the previous day's price range.
Refers to a period of time often measured in terms of weeks or months.
A trading range where there is an exhaustion gap up, then prices trade in a narrow range for a few days, then there is a breakaway gap down. This leaves a sort of island of prices in the middle. The reverse happens at an island bottom reversal.
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 the chart covering the prices, hence the name. The pattern indicates a tight balance between supply and demand and thus the direction of the eventual breakout is made more meaningful as an indicator of the direction of the next move.
A general term used to indicate how easily transactions can be executed 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 market can absorb more buying (selling) before a significant price change occurs than can an illiquid market.
The tendency of some markets to move in equal or similar price distances before starting a consolidation phase. Momentum: The strength or sustainability of a market move as measured by both volume and price. Moving average based indicators are often used, as are comparisons with the levels of previous time period.
A continuous smoothing technique computed by averaging a series of numbers (price, volume, etc.) progressively over a period of time. The series is often a week, a month or a quarter in length and is computed anew as each day or week goes by. It is often then plotted on a chart with the raw data for analysis purposes.
On Balance Volume:
A price/volume type of indicator where the volume for the period (day, week, etc.) is added to a cumulative total if the price rose, and subtracted if the price fell. No entry is made if the price was unchanged in the period. Developed and popularized by Joseph Granville in the early 1960s.
A market condition wherein a market has recently extended or exceeded its normal range of movement on the upside. Often accompanied by increased volume and/or a string of unbroken up days. The condition implies a near term reversal is imminent.
The reverse of overbought. For the market as a whole, these conditions 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 eventual reversal occurs.
A distinctive formation created on a chart by the up and down movement of prices. For example, head and shoulders, triangle, and double top.
A brief triangular consolidation within a steep advance having generally short-term implications. For inverse, see Flag. Pivot Point: The sum of the high, low and closing price divided by three. The following trading session, if the market falls below the pivot point, it could act as resistance. Accordingly, if the market rises above the pivot point it may act as support.
50% Principle (one-half retracement):
After a sustained move in price, this principle holds that a normal correction can be expected to retrace one-half to two-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 volume dimensions are omitted. Price data are plotted on graph paper. New columns are begun when a reversal by at least one unite can be recorded.
A relatively rapid return, after a breakout, to the boundary area of the preceding pattern. It is usually characterized by light volume.
Price movement in the opposite direction to a market’s overall trend.
Price performance of a market compared to a given norm, such as the Standard & Poor's 500 or the Dow Jones industrial average. A market moving up 20% when the norm moves only 10% is considered to have good relative strength.
A supply waiting to be sold at a price above the current level. Significant trading at that level has previously created a pattern which suggests there would be resistance to the price moving significantly above that level without a great deal changing hands.
A shift in the direction of price movement caused by a change in demand and/or supply. Generally the longer the reversal pattern takes to develop, the more serious its implications.
A gently curved chart formation resembling a saucer. This type of reversal pattern, usually occurring after an extended decline, begins to develop as demand overcomes supply (vice versa for tops). The formation often takes an extended period to complete, occasionally as much as half a year. A similar pattern is traced by the volume, which accompanies it.
The trend that encompasses two or more cyclical trends or two or more economic cycles and often last 10 to 20 years or longer.
Indicators which attempt to gauge individual investor and/or professional attitudes toward the market. Monitoring the degree of optimism or pessimism present is a major tenet of technical analysis. Two examples are the amount of shorting being done and the number of advisory services which are bearish or bullish.
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 opposite direction.
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.
The movement of a market toward a previously established support or resistance level. It will respect the area reinforcing the support or resistance available there, or penetrate and initiate a new technical event such as a 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 one of several recognized reversal patterns.
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).
A line which is drawn through successive maximum price movements, i.e., through a series of two or more successively lower peaks (downtrend) or successively higher troughs (uptrend). Trendlines can also be drawn through the close. The more instances of contact, the more the line is reinforced.
Narrowing of a trading range formed by a series of lower highs as well as higher lows. The pattern is completed by an often sharp high volume break through either of the converging trendlines.
Similar to a double top, though much rarer, but with three peaks instead of two. Volume on each successive peak is usually less than on the previous peak. The pattern is completed when the price declines below the second reaction low.
A price pattern resembling the letter V, characterized by a sharp downward move followed immediately by a rapid upward progression, which is often accompanied by heavier volume.
Similar to the triangle but with both converging trendlines, trending sharply in the same direction. An upward or downward slanting triangle (rising wedge, falling wedge). It can be either a continuation pattern or a reversal pattern.