|
ABC of Technical Analysis
Advance/decline line
Each day's declining issues are subtracted
from that day's advancing issues. The difference is added to (subtracted from if
negative) a running sum. Failure of this line to confirm a new high is a sign of
weakness. Failure of this line to confirm a new low is a sign of strength.
Area
pattern
When a stock's or commodity's upward or
downward trend has stalled, the sideways movement in price which follows forms a
pattern. Some of these patterns may have predictive value. Examples of these
patterns are head and shoulders, triangles, pennants, flags, wedges and
broadening formations.
Candlestick charts
A charting method originally developed in
Japan. The high and low are described as shadows and plotted as a single line.
The price range between the open and close is plotted as a rectangle on the
single line. If the close is above the open, the body of the rectangle is white.
If the close of the day is below the open, the body of the rectangle is black.
Congestion area
At a minimum, a series of trading days when
there is no or little progress in price.
Correction
A price reaction of generally 1/3 to 2/3 of
the previous gain.
Cup
and handle
A pattern on bar charts. The pattern can be as
short as seven weeks and as long as 65 weeks. The cup is in the shape of a U.
And the handle has a slight downward drift. The right hand side of the pattern
has low trading volume. Commonly used softwares§ Metastock from Equis
International § Iris (for intra-day charts) § ASA Technical Analysis
Double
bottom/double top
These are reversal patterns. It is a decline
or advance twice to the same level (plus or minus 3 per cent). It indicates
support or resistance at that level.
Elliott Wave Theory
Originally published by Ralph Nelson Elliott
in 1939, it is a pattern recognition theory. It holds that the stock markets
follow a pattern of five waves up and three waves down to form a complete cycle.
Many technicians believe that this pattern can hold true for as short a time
period as one day. However, it is generally used to measure long periods of time
in the markets.
Fibonacci ratio
It's the relationship between two numbers in
the fibonacci sequence. In general terms the fibonacci series is 1, 1, 2, 3, 5,
8, 13, 21, 34, 55, 89 - where the previous two numbers are added to derive the
next number. 0+1 is 1, so the first number is 1. 1+1 is 2, so the next number is
2, and so on. The sequence for the first three numbers is 0.618, 1.0, and 1.618.
Fibonacci Ratios and Retracements can be applied both to price and time,
although it is more common to use them on prices. The most common levels used in
retracement analysis are 61.8 per cent, 38 per cent and 50 per cent. When a move
starts to reverse the three price levels are calculated (and drawn using
horizontal lines) using movements from low to high. These retracement levels are
then interpreted as likely levels where counter moves will stop. Head and
shoulders pattern This can also be inverted. It is a reversal pattern and is one
of the more common and reliable patterns. It is comprised of a rally which ends
a fairly extensive advance. It is followed by a reaction on less volume. This is
the left shoulder. The head is comprised of a rally up on high volume exceeding
the price of the previous rally. And the head is completed by a reaction down to
the previous bottom on light volume. The right shoulder is comprised of a rally
up which fails to exceed the height of the head. It is then followed by a
reaction down. The last reaction down should break a horizontal line drawn along
the bottoms of the previous lows from the left shoulder and head. This is the
point in which the major decline begins. The major difference between a head and
shoulder top and bottom is that the bottom should have a large burst of activity
on the breakout.
KST
Short for know sure thing, the KST indicator
was developed by Martin Pring. A weighted summed rate of change oscillator. Four
different rates of change are calculated, smoothed, multiplied by weights and
then summed to form one indicator. Moving averages convergence/divergence (MACD)
The crossing of two exponentially smoothed moving averages. They oscillate above
and below an equilibrium line.
Negative divergence
When two or more indicators, indices or
averages fail to show confirming trends. Relative strength index (RSI) RSI is an
oscillator first introduced in 1978 by Welles Wilder in Commodities (now
Futures) Magazine. The RSI compares the magnitude of a stock's recent gains to
the magnitude of its recent losses on a scale from 0 to 100. When using RSI as
an overbought/oversold indicator, Wilder recommended using levels of 70 or more
as overbought and 30 and below as oversold. Generally, if the RSI rises above 70
it is considered bullish for the underlying stock. Conversely, if the RSI falls
below 30, it is a bearish signal. Relative strength A comparison of an
individual stock's performance to that of a market index. Most times the S&P 500
or the Dow Jones Industrial Index are used for comparison purposes. It is
calculated by dividing the stock price by the index price. A rising line
indicates that the stock is doing better than the markets. A declining line
indicates that the stock is not doing as well as the markets.
Resistance
A price level where a security's price stops
rising and moves sideways or downward. It indicates an abundance of supply.
Because of this, the stock may have difficulty rising above this level. There
are short-term and longer-term resistance levels.
Support
A price level at which declining prices stop
falling and move sideways or upward. It is a price level where there is
sufficient demand to stop the price from falling.
Trendline
Constructed by connecting a series of
descending peaks or ascending troughs. The more times a trendline has been
touched increase the significance of a break in the trendline. It can act as
either support or resistance. |
