A momentum indicator which tells the supply and demand for the underlying security by showing divergences among price and volume. The calculation is as follows:

Acc/Dist = [(Close – Low) – (High – Close)] / (High – Low) x Day’s volume

A market breadth indicator used to confirm the underlying strength of a particular index – mainly the NDX, SPX and NYSE. The line is a running cumulative total and is bullish if the line is rising and bearish if declining.

Advance/Decline Line = (advances – declines) + prior A/D line value

Alpha measures the difference in return from an estimated expected return, and what return is estimated by the Capital Asset Pricing Model (CAPM).

Alpha= E(r)-Rf+B(Rm-Rf)
Where E(r): Expected return
Rf: Risk Free Rate- typically a T-Bill Rate
B: Beta of Stock
Rm: Return of Market

The above formula essentially is a measure of risk-adjusted performance for an individual security above and beyond what is expected given its beta to the marketplace.

A certificate issued by U.S. Banks representing a specified amount of share(s) of a foreign stock traded on a U.S. exchange. ADRs are issued by U.S. depositary banks and are often priced closely to that of the shares in their home market. ADRs allow American investors to purchase shares of foreign companies without undertaking the risk of currency fluctuations while retaining the benefits of dividends being paid in U.S. dollars.

A technical indicator found on charts which can show where support and resistance lines may lie. This is formed by starting at the bottom of a trough (Point 1), and drawing a line that runs through the middle of the two extreme points (Points #2 & #3). This middle line forms the handle, and the middle tine of the pitchfork. To form the rest of the pitchfork, two more trend lines are then drawn, one above, and one below the original middle line, with all three lines being parallel.

Charting scale method where equal price differentials are given equal vertical spacing. Mainly used by technicians for shorter time periods (less than two years).

A channel is the range that a stock trades within, bound by two levels: “support & resistance.”
A breakout from a top side of a channel is viewed as Bullish, while a bottom side breakout is viewed as Bearish.

An ascending channel is a type of channel in which a stock is in an upward trend but bound by two parallel upward sloping trend lines. The upper trend line connects at least 3 of the highs of the security while the lower trend line connects at least 3 of the lows.

The price a broker/dealer is willing to sell (fill an order) a security at, it is usually also called the “offer,” and almost always is higher than the bid except in rare occasions.

This term defines a period of time where prices in a financial market are falling. The bear market differs from a correction in terms of duration and scope. The common rule of thumb is markets that are down 20% from their highs are considered to be bear markets rather than corrections. The most recent example of a bear market is the period from March 2000 to February 2003. For a more comprehensive review of market history, please click here.

Measure of a security’s volatility relative to its given asset class. For stocks, beta is normally calculated relative to the S&P 500. For example, if Stock A has a calculated beta = 2.0, then the security has twice as much volatility relative to the S&P 500. When the S&P 500 moves up 1%, Stock A historically moves higher by 2%.

Examples of High Beta Stocks in the recent Bull Market include Apple (AAPL), Google (GOOG) and Research in Motion (RIMM). Each of these companies have demonstrated outstanding earnings and share price growth over the past 5 years.

The price a broker/dealer is willing to buy a security at, and almost always is lower than the ask except in rare occasions.

Technical topping pattern characterized by a sharp rise in price followed by a sharp decline to the point of original ascent.

Source: WONDA

A breakaway gap occurs after a stock has been trading in a tight or congested range for a decent period of time, usually 2-3 weeks. The level above this specified range is called resistance and the area below this range is called support. When investor sentiment changes for the stock, the stock either gaps up or down over its respective resistance or support levels. When this happens, volume picks up drastically as “new” investors rush in and “old” investors on the wrong side of the trade have to “cover” themselves. Once the breakaway gap occurs and the stock begins to trade outside its old range, a new trend is in place for the security.

A technical term for when a security price trades down through an identified support level. It is important to note that broken support levels will then become overhead resistance. Breakdowns can sometimes occur with heavy volume if many people are watching the same technical levels. Traders will sometimes enter short positions on breakdowns and retests of support levels. Breakdowns can occur on different time scales, generally the larger the time the broken trend was held the more severe it can be for the security.

When a security exits a certain pattern or level of prices that have been deemed as resistance. Traders will usually enter long positions on breakouts if the proper amount of confirmation volume is present.

The term defines a period of time where prices in a financial market are rising. From September 2003 to May 2007 (as of writing) the U.S. has been in a bull market. Bull markets are generally about four years but can be shorter or longer based on a range of factors. For a more comprehensive review of market history, please click here.

This is a breadth indicator that can only be used on a group of stocks, as opposed to other indicators that can be used on just one stock. It is calculated as a percentage of what securities are showing a buy signal on a point and figure chart, versus the number of securities in the group that are not.

This occurs when a security breaks a pattern with a significant amount of volume and exceeds the price level of resistance or support. Confirmation volume and price levels are determined by looking at prior levels and volumes. Confirmation is used to show that the “breakout” is real and sustainable, not a “fake-out.”

A technical term for when no change in price really occurs. The security may trade close to support or resistance level- but no change over all will result for this usually brief period.

A technical formation which expresses a temporary pause from the overall trend of the security. These types of technical patterns can last for several months and commonly include triangles, flags, and wedges.

A contrary indicator is an index or event whose relevance to the market is the opposite of what is initially apparent from the information the indicator provides. Some examples of contrary indicators include the Volatility Index (VIX) and Short Interest.

When a security price changes trend in the short term and “retraces” some of the move it had made prior, although it is not a large enough move to change the trend. In a Bull market corrections are known as reactions and in a Bear market they are known as rallies.

Crossovers refer to when a stock trades through a certain indicator, in most cases moving averages or Bollinger Bands. Crossovers can signal either a bullish or bearish trend. For example, if a stock trades below its 20day moving average, this indicates a loss of short term interest in the security and would be viewed as bearish.

Source: WONDA

This index is a measure of momentum which confirms the overall market trend by assessing whether money is flowing into or out of the marketplace. Similar to the A/D line this is a running cumulative total index.

CVI = (volume of advancing stocks – volume of declining stocks) + prior CVI

The CVI can also be used as a divergence indicator and is similar to the On Balance Volume (OBV) indicator.

This is a base pattern in technical analysis which resembles a cup in a “U” shape with a “handle” that can be slightly down-trending, or also in a “U” shape. With the Cup and Handle pattern, the stock tries to rise to a new high but fails due to selling from investors that previously held stock at the previous high. The stock will therefore trend down or sideways in price and form the handle getting the last few sellers out of the way. Once buyers step in, the security should increase in price and breakout past the old high which will be close to the high of the handle.

These are companies that more sensitive to economic data and the overall health of the economy. If the economy is performing well then these types of stocks tend to perform well, but in times of recession or economic uncertainty they can perform poorly. An example of a cyclical stock would be a construction manufacturing company like Caterpillar (CAT). During economic expansions, construction tends to ramp up and as a result demand for Caterpillar's products would increase, ultimately leading to profit growth for the company.

Stocks that tend to perform well regardless of the current business cycle or stock market environment are considered defensive in nature. They have better relative performance during periods of high volatility or bear markets but will often lag other stocks during bull markets. Defensive stocks tend to have high dividends and betas less than 1. Defensive stocks are in sectors where demand is fairly constant through different business cycles such as food, tobacco, drug manufacturers, and household products. Some examples of defensive stocks are Proctor and Gamble (PG) and Altria (MO).

The depth of a security refers to the liquidity of the issue, essentially how much a stock can be bought and sold without affecting its price in the upward or downward direction. For example, lets assume stock A and stock B are both $30, but stock A trades on average 10million shares a day and stock B only trades 100,000 shares. The depth of stock A would be much greater and therefore its price movement would be less sensitive to larger share amounts being traded – stock A has a deeper market.

A divergence occurs when an asset price and an indicator move in opposite directions and often signals the beginning or end of a trend. Divergence can be either positive or negative. Divergences are positive when an indicator begins to move upward while an asset price is making new lows. A negative divergence is when an indicator begins to move downward while an asset price is making new highs. An example of positive divergence is a stock making new lows while the stochastic oscillator begins to move up. This can help spot changes in trends. Below is an example of negative divergence. Notice how the negative divergence between the stochastics and the stock is followed by a sell off.

Source: WONDA

When a security’s open and close are almost the same, this will generally look like a cross or a plus sign. Found by themselves, they are typically viewed as neutral, but as part of other patterns they generally can signal something else.

A double top is a reversal pattern in a security that has been trying to break out from a price ceiling. In a double top, a stock will come to a ceiling and then trade down to the price floor. With time, it can trade back to the ceiling and come back to the floor once more- this will confirm that it is a double top if it breaks through this floor. This pattern is usually marked by an “M” formation. Since a Double Top is a reversal pattern, if it breaks through this price floor, or support line, the stock will most likely keep declining in price- until this trend is broken.

The DJIA is a price-weighted index comprised of 30 blue-chip stocks representing various industries throughout the United States. It was originally founded in 1896 with 12 companies; General Electric is the only remaining DJIA component today. The DJIA is the most popular index perhaps because of its historical significance, but investors must be aware that the DJIA does not provide the best picture of the broad marketplace. Also, the DJIA is a price weighted index where more weight is given to stocks with higher prices- critics claim this practice hides the true fundamentals of the index and its components.

This index includes 20 of the major transportation companies from various industries including: Airlines, Freight & Shipping, and Railroads. This was the first index ever formed in the U.S.; it originally tracked 11 railroad stocks in 1884.

This is a price weighted index that tracks 15 Utility Companies, the index originated as part of the Dow Jones Industrial Average, but in 1929 Utilities was separated into its own index.

A theory developed by Charles Dow that serves as a basis for technical analysis. Dow Theory has six major tenets: markets have three trends (upward, downward, and sideways); trends have three phases (accumulation, rapid price change, and distribution); stock markets discount all news; the various averages have to confirm each other or in other words move together to signify a significant sustainable move; trends must be confirmed by volume; and trends exist until definitive signals prove they have ended.

The Dow to Gold ratio measures the price of the Dow relative to Gold, for example a ratio of 20 implies each Dow share costs 20 ounces of gold.

Despite recent gains by the Dow and Gold over the past 7 years, the index’s price has been on a steady decline.

The Dow to Gold ratio currently stands at around 16.67

A gap created from the stock being priced down at the open when the divided is deducted on the “ex-dividend” date.

An exponential moving average is similar to a simple moving average except, in an EMA more weight is applied to the more recent data. These averages react faster to recent data than changes in a simple moving average.

Asset prices are extended when they have risen above previous resistance levels as well as fundamental valuations at a very quick pace. Buying when an asset is extended is ill-advised because of the heightened risk that it will return to some previous level of support.

This occurs when a security breaks out of a resistance level, but quickly turns around and falls below the same level. This is also known as a “Fake Out,” and can affect traders negatively when they buy on the breakout only to have the trade go against them.

These are a set of numbers discovered by Leonard Fibonacci in the 12th century. The most interesting fact about these numbers is they all possess a series of relationships. Their application in the stock market is applied to a set of studies known as Fibonacci Studies which are also found here; the most common ones used are arcs, fans, retracements, and time zones. The Fibonacci numbers are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233…
The numbers can be found by adding the two previous numbers together.

Fibonacci Retracement: This is a technical term for when there is a possibility that a security will retrace a prior move to support or resistance (at the Fibonacci Level) before continuing the trend. The calculations of retracement level is done by creating a trend-line between two extreme points, then dividing the vertical distance certain Fibonacci Ratios (23.6%, 38.2%, 50%, 61.8%, & 100%).

A term coined by Tuttle Asset Management which collectively refers to the 4 major US Equity Markets. From eldest to youngest, the "Four Sisters" include the Dow Jones Industrial Average (DJIA), Standard & Poor 500 (SPX), NASDAQ 100 (NDX) and Russell 2000 (RUS).

A reversal pattern that generally will occur at the top of the market, and is known to be a Bearish signal. This pattern is formed by 3 peaks, with one, the highest being the head, occurring in the middle, surrounded by two shoulder peaks. The other two peaks should hit their highs and fall to the neck line. The neck line is usually a horizontal trend-line providing support for the entire pattern. Should this neck line be broken then this will confirm the head and shoulders pattern and there is a good chance that the security price will start a new downtrend. There are also Inverse Head & Shoulders Patterns- which are the same pattern upside down- it signals the bottom of a market. A breakout from an inverse head and shoulders is Bullish. Breaking out of a Head and Shoulders pattern or an Inverse Head and Shoulders Pattern will reverse a current trend and usually occurs with a measured move equal to the distance of the neck line to the top of the head.

A day of trading in which the entire day’s range is inside the previous day’s range.

Tuttle Asset Management term that describes a stock “jumping” over a key support or resistance level. See Breakaway Gap.

Source: Daily Graphs

These patterns are extremely important and are found at market tops and bottoms. When found at the top of a market the pattern will look like a hammer, the security, or index, may open low, trade quite higher through the day, but will end up closing only slightly above the open.
When found at the bottom of a market, the security will open and trade quite low during the day, but will eventually close very close to the open.

A stock or industry group that is underperforming the market or a selected benchmark. In almost all cases laggards eventually catch up to the rest of the market or the market pulls back in line with the laggards. During the bull market of the 1990s, energy and commodity stocks were market laggards and underperformed the rest of the market.

A stock or industry group that is outperforming the market or a selected benchmark. As with laggards, leaders eventually pull back to the rest of the market or the market catches up to the leaders. During the most recent bull market energy and commodity stocks have been leaders and outperformed the rest of the market.

Charting scale method where percent price differentials are given equal vertical spacing. Mainly used by technicians for longer time periods (more than two years).

These patterns are extremely important and are found at market tops and bottoms. When found at the top of a market the pattern will look like a hammer, the security, or index, may open low, trade quite higher through the day, but will end up closing only slightly above the open.
When found at the bottom of a market, the security will open and trade quite low during the day, but will eventually close very close to the open.

Number of advancing issues verses declining issues within a given index. Used by technicians to determine the underlying strength of a particular move up or down (a confirming indicator). There are many different breath indicators used by technicians. Most common are the Advance/Decline line or index, Cumulative Volume Index (CVI), the McClellan Oscillator and Arms (or TRIN) Index.

The McClellan Oscillator is a momentum breadth indicator stemming from two separate Day Exponential Moving Averages (DEMA) of the NYSE net advances. Mainly used by technicians to diagnose whether the overall market is overbought or oversold.

McClellan Oscillator = (19-DEMA of (A-D)) – (39-DEMA of (A-D))

Similar to the MACD, this oscillator can be used in calculating multiple types of signals ranging from the “Zero line” cross, overbought/oversold readings, and positive/negative divergences.

Refers to the rate of acceleration of a security’s price or volume. Momentum can be upward or downward in reference to the direction of the security’s price. Momentum traders buy securities moving higher on strong volume or sell securities moving lower on strong volume. These are usually shorter-term trades.

The “MAC-D” is a momentum indicator that shows the relationship between 2 moving averages. It is calculated by subtracting the 26 day exponential moving average (EMA) from the 12 day EMA. A 9 day exponential moving average is then placed on top of the 26 and 12 EMAs for the purpose of signaling buy and sell signals. This 9 day EMA is known as the “signal line.”

How it is used:

MACD is used mainly in conjunction with Crossovers and Divergences. A crossover is signaled when the MACD and Signal Line cross each other. If the MACD crosses above the Signal line this is a bullish signal, if it crosses below the signal line this is generally a bearish signal.

The Divergence is used to tell when a trend is possibly ending. If the price of the security has continued to rise, but the MACD does not reflect this, then it is possible that the price will come down.

The “Zero” line is used as a reference to gauge short-term momentum. For example, when the MACD crosses over zero, the short-term average is increasing relative to the long-term average indicating bullish short-term momentum.

NASDAQ is an acronym for National Association of Securities Dealers Antiquated Quotation system and is the largest U.S. electronic stock market.

The NDX represents 100 of the largest domestic and international non-financial securities listed on the NASDAQ. It is based on market capitalization both in its selection and weighting characteristics.

The Nasdaq Composite Index represents more than 3,000 companies traded on the National Market System which are smaller growth companies, many in technology and financial services.

The NMS began in 1978, as a result of the Securities Act Amendments of 1975, and linked nine markets electronically by ITS computers. They include American, Boston, Cincinnati, Chicago, New York, Pacific, Philadelphia and NASD OTC.

This data is often used as a reference for the breadth of a market move. New Highs refer to the number of stocks in a given market (NYSE, NASDAQ, AMEX) that are making new 52-week highs. New Lows refer to stocks making new 52-week lows. These data points are reported separately but also represented as a fraction of New Highs over New Lows for which a moving average can be given.

A traded amount that is less than the typical amount traded for a specific asset. For stocks, the typical trade lot is 100 shares, which is referred to as a round lot.

This pattern often occurs at tops or bottoms in a market or stock and signifies the reversal of the overall trend. During an uptrend, a stock will open above the previous day’s close, trade higher making new highs, but will close below the low of the previous day. During a downtrend, a stock will open below the previous day’s close, trade lower making new lows, but will close above the previous day’s high. The more significant the volume or price swing on this day is than the more significant the signal.

A term for when a security’s prices (High & Low) exceed the range of prices of the previous day (both high and low). If the security closes outside of a resistance level then this is very Bullish, whereas if this occurs inside of a resistance level, to the down-side, it is generally viewed as Bearish.

An Overbought situation can occur when a security price has risen dramatically above what many believe to be a fair price based on fundamentals of the security. This type of situation can also occur in technical analysis when the price of a security reaches the uppers limits of an indicator, usually in a short mount of time.
An Oversold situation can also occur in both fundamentally and technically based situations. An Oversold situation is when a security price falls below what is believed to be fair value. In technical analysis, an Oversold situation would occur when a security reaches the lower limits of certain indicators. In both situations (Overbought/Oversold) a reversal can occur in which Overbought securities will sell-off and Oversold securities may rise from lows.

The PVI used to highlight days where volume has increased significantly above previous days volumes. The idea behind this index is to spot when affluent investors are trading and dominating the markets on the quieter days. This index is used in conjunction with the negative volume index, which highlights lower volume days. The PVI crossing below its 1 year moving average increases the chances of a bear market.

This indicator gauges investor sentiment by looking at a ratio of put options to call options. A higher volume of call to puts would imply a Bullish outlook on the market.

A type of analysis that uses statistical modeling and complex mathematical models to value financial instruments; it can also be used to price options, and value companies.

This is a trading tactic in which a trader will trade based on strong resistance and support levels; entering long positions when the security bounces off the support, and going short when the security trades down from resistance. The idea is that the Support & Resistance levels create the range which a security can and will be trading. Range bound trading can also be used simply to describe the manner in which a stock trades.

This indicator compares recent stock gains to recent stock losses over a certain trading period and converts this observation into a fraction 0 and 100. The calculation is:

RSI= 100- 100/1 + RS

Average Gain= (Total Gains/n)

Average Loss= (Total Losses/n)

RS= (Average Gain/Average Loss)

Where n is the number of periods, typically 14.

Technicians use the RSI to signal for overbought and oversold levels, with 70 being overbought, and 30 being oversold. Divergences in the RSI can also be used to generate signals- an example could be an RSI failing to make new highs while the stock continues to climb higher. This divergence diminishes the strength of the stock’s upward move and could indicate an “extended” security. We use the word could because as with all indicators, the RSI needs to be used in conjunction with other data points to properly evaluate investment decisions.

The price level on a chart where the security finds sellers. The security may be ticking upward, but when the security reaches resistance, sellers come into the market and outnumber the buyers. Resistance levels can stay in tact for extended periods of time and the more times a security tests its resistance level (see the points below) through, the stronger the breakout when the security does indeed trade past this point.

This technical term occurs when a security breaks a trend and turns the other way. This is usually found once a security has been in an established uptrend with support; the reversal begins once the security breaks the support and begins a downtrend.

Often times a stock in high demand will gap up due to increased awareness or enthusiasm. This can result from an earnings announcement or news event and is accompanied with high volume. This is not a change of trend, but rather a continuation of the trend in place.

The Russell 2000 Index is a market capitalization weighted index comprised of the smallest 2,000 companies in the Russell 3000 index and is considered the premier measure of small cap stocks in the U.S. equity markets.

Statistical derivative which is designed to measure correlation between two asset classes. The range in value of R^2 is between +1 and -1. A value of 1 signifies the asset classes move in perfect harmony, whereas a value of -1 means the securities move perfectly opposite in direction. Lastly, no correlation exists when the value of R^2 is equal to 0.

When a trader sells a long position and/or sells short into an uptrend. The idea is that a reversal is coming even though the current trend does not show that. It is the opposite of “buying into weakness.” The trader would have to feel certain, and have a tolerance for risk about the change in trend to enter a short in this manner, but by entering a short early he can guarantee his position and not miss the move down when it comes.

This is the total number of shares of a security that have been sold short. This information is often used as a contrary indicator by technicians in order to predict a short squeeze. This situation occurs when a proportionately high percentage of investors are short the stock. The stock will get an extra boost on any positive news as investors are forced cover their shorts.

This is the number of days it would take to close out all short positions based on average daily volume.

A technical indicator represented by a line on a chart that is taken from the average of security prices based on a time period- some usual time periods are 10, 20, 30, 50, and 200 days. Moving averages allow for a set of data points to be “smoothed” out in order to analyze overall trends for a specific time period. The calculation for a simple moving average is quite easy; take the closing prices for a specified period add them together and then divide by the length of the period. Often times, technicians use moving averages for buy and sell signals. When the 50day moving average crosses over the 200day moving average, a “buy” signal is flashed as the security is being accumulated. However, as seen from the chart below, when the 50day ma crosses below the 200day ma, a “sell” signal arises as the stock is under distribution.

The SPX is a value weighted index – meaning each stock’s weight is proportionate to its market value – comprised of 500 leading companies representing the broad U.S. Economy. It is considered by many to be the ideal proxy for the total market and is the most widely used benchmark of U.S. equity performance.

This indicator measures the relationship between the S&P 500 and the yield on the 10 year treasury. The purpose of the indicator is to see when one becomes overvalued relative to the other. It will typically fluctuate between -3 & +3, a measure larger than this could mean that one is overvalued relative to the other and a correction could occur.

The price level on a chart where a security finds buyers. The security can be in a price decline but when it approaches the support level it may bounce off of it, level off, but it won’t precede any further down in price. If the security does break a support level, this is viewed as bearish and the former support level will now serve as resistance. It is important to note that support levels can be up-trending, horizontal, and/or down-trending depending on the type of the present trend.

The art of interpreting and depicting a graphical illustration as it relates to investor psychology in relation to the existing condition of the markets. As such, TA should be employed for the sole purpose of commandeering a greater comprehension of the markets’ supply and demand elements which underlay its position at any given time.

This market breadth indicators shows how volume is moving in or out of advancing and declining issues. The calculation is as follows:

TRIN= [(advancing issues/declining issues)/ (volume of advancing issues/ volume of declining issues)]

Created in 1993, this index measures the volatility of the S&P 500 by considering the implied volatilities of a broad basket of S&P500 options. This forward looking indicator is often referred to by the media as the “investor fear gauge.” The VIX is a contrarian indicator meaning when it reaches extreme levels in either direction, a change of market sentiment may lie ahead. History tells us that a value greater than 30 is generally viewed as a time with increased uncertainty in the marketplace; whereas a value less than 20 corresponds to greater investor confidence. A contrarian would view a high volatility measure as a time to buy and the opposite holds true for a low reading. The reason being is that when the investment herd all moves to one side of the trade, unwinding that trade becomes very difficult when everyone is trying to escape “out of the same door” when things turn. In the markets, it is often said to expect the unexpected.

Source: Yahoo Finance

This is an index that measures the implied volatility of the Nasdaq 100. Both the VIX and the VXN are calculated in the same manner using the implied volatility of a 30 day option that is at the money.

A term used to describe probabilities of an issue’s direction based on multiple technical and fundamental indicators; the higher the “weight” the higher the probability of the issue’s next predictive move.

WOE probability example:

If a dog lives in Florida it has a 20% probability of having fleas.
If a dog has long hair it has a 20% probability of having fleas.
If a dog has no flea collar it has a 20% probability of having fleas.
If a dog sleeps outside it has a 20% probability of having fleas.
If a dog always digs in the dirt it has a 20% probability of having fleas.
If a dog only gets bath once a month it has a 20% probability of having fleas.

Solely being told a dog lives in Florida would only give you a 20% probability the dog has fleas. However, being told the dog lives in Florida, sleeps outside, has long hair, has no flee collar, always digs in the dirt, and only gets bathed once a month gives you a 73.79% probability of having fleas.

This occurs when someone buys/sells short a security only to have the trade go against them quickly. An example would be if an investor buys a stock only to see it fall to their stop price shortly after they are filled.