Glossary of Technical Analysis Terms
The following is a glossary of some of the terms commonly used in technical analysis.
Acceleration
A chart pattern where the rate of change of share price increases sharply.
Activity Level
A price level at which notable activity has been observed, i.e. an old support, resistance or breakout level.
Advances & Declines
A comparison of the number of stocks advancing and the number of stocks declining. See also the Cumulative Advance/Decline Line and Ratio.
Ascending Tops
Any chart patterns where share price peaks become progressively higher. Also known as higher highs.
Base
Usually seen after a large decline – an area of support forms from which a rally may eventually begin. In a nutshell, the stock stops making new lows.
Bar charts
The open, high, low and close of the day are represented in chart form. The tick on the left side of the bar represents the open and that on the right the close. Some bars do not have an opening tick.
Bear / Bull Trap
Temporary trade below / above existing support / resistance that initially appears to be a price breakout but then fails to follow through, thus ‘trapping’ traders that had taken the signal.
Bearish Resistance Line (point & figure technique)
A downtrend drawn at 45 degrees from the top right corner of a rising column of Xs, usually a significant top.
Bellwether
Traditionally the sheep (with a bell on its neck) that led the flock. Now used to describe a closely followed stock that leads the market.
Beta
A measurement of a stock’s volatility relative to a market index. Thus, a stock with a Beta of 1 will generally move 1% for a 1% move in the underlying index. Remember, Beta figures are not set in stone and a stock’s characteristics can change over time.
Blow off Top
The final buying climax at the end of a rally. This takes the form of a spike high, often formed on high volume.
Breakaway Gap
A gap formed on completion of a price pattern that signals a continued move. For example, the break of a resistance level above a base formation on a gap up.
Breakout
A sustained move through a support or resistance line. As a rule of thumb, this should consist of more than one day’s price action. The subsequent move can be powerful. Contrast this with a ‘Bear / Bull trap’, see above.
Bullish Percentage Indicator
A measure of the percentage of stocks exhibiting p&f bullish trends (the current or last X column goes above the preceding X column) within a given industry group or index.
Bullish Support Line (point & figure technique)
an uptrend drawn at 45 degrees from the bottom right corner of a falling column of Os, usually a significant bottom.
Buying Climax
A type of reversal signal. Where a new 52 week high is made followed by the stock falling and closing below the previous week’s close. Also, the total number of buying climaxes across the whole stock market can provide clues as to the timing of market tops.
Candlestick
Originally a Japanese version of the Bar chart where a lower close than open on a day / time period is shaded dark and a higher close than open on a day / time period is shaded light. Now widely used.
Charting
The study of historical price patterns / action in order to determine likely future movements.
Common gap
A gap that forms within a well defined trading range or congestion area. These have no particular implication.
Congestion
A period of directionless trade within a range bound by support and resistance levels.
Counter Trend
A minor or shorter-term move against the prevailing trend.
Cumulative Advance/Decline Line
This indicator is a non-price measure of the trend of the market. It is a cumulative index of the data for advances and declines described above: the difference between the advances and declines is calculated daily and added/subtracted from/to the cumulative total from previous days.
Divergence
Prices moving in an opposite direction to another indicator. E.g. share price rising but volume decreasing may indicate a potential turning point is on the way.
Double Bottom / Double Top
Is formed when a market makes a high / low then retreats from it only to test it once more. If support or resistance holds at the high / low level, a turning point may be in prospect. The formation is only completed when the intervening minor low / high is broken on a closing price basis.
Downtrend
A sequence of lower lows and lower highs.
Elliott Wave
A technical analysis technique that applies the ideas of ‘natural law’ to pattern analysis and prediction of financial markets.
Exhaustion gap
A gap that forms near the end of an extended move. It is a last gasp move, exhausting the bullish or bearish sentiment and is followed by a reversal. The gap is confirmed as an exhaustion gap by a closing price below the lower boundary of the gap (in the case of uptrend exhaustion) or upper boundary (in the case of downtrend exhaustion).
Fibonacci ratios
Ratios used by technical analysts to identify likely price targets of trend retracements and extensions. The core ratio is based on the well known Fibonacci mathematical sequence, 1:1:2:3:5:8:13 etc
Gap
A move up / down in a market where the entire trading range of a day / time period is above / below that preceding it. Gaps are classified according to where they appear within a price pattern. The classifications are ‘breakaway’, ‘measuring’, ‘exhaustion’ and ‘common’. See these phrases for their definitions.
Head and Shoulders
Three pronged chart formation resembling a head and two shoulders, where the second peak marks the extreme of the trend. The third peak fails to extend beyond the second. The pattern is completed by a break of the “neckline”, signalling a trend reversal. Also "Inverse Head and Shoulders" at market bottoms.
Line Chart
The simplest form of chart, connecting end of day / time period closes.
Moving Average
The average price of a stock / market over any given (rolling) period of time. Used primarily as an indication of trend, less useful in range bound markets. Usually plotted at the end of the time period covered but can be centred or shifted as required.
On Balance Volume
OBV is an indicator that adds a period’s volume to a cumulative total when the close is up on the previous day and subtracts the period’s volume from the cumulative total when the close is down on the previous day. The cumulative total is plotted as the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation.
Overbought / Oversold
A technical condition that occurs when price is considered to have risen or fallen too far, too fast and is susceptible a pullback. Overbought / oversold indicators (RSI, stochastic) for example) often have values within the range 0 to 100, with overbought territory being defined as above 70 or 80 and oversold defined as below 30 or 20. Remember that overbought is not necessarily the same as being long term bearish. It just means that the stock has risen too far too fast and might be due for a pullback.
Percentage High & Lows
An indicator is calculated by dividing the daily new highs by the sum of daily new highs and daily new lows and displaying the result as a percentage.
Point & Figure
Charting technique where price falls are marked by a ‘O’ and price gains are marked by a ‘X’. The chart is plotted without the time element and can be used as a ’noise reduction’ system.
Relative Performance
A comparison between a share and its peers or underlying market made to determine over / under performance. Not be confused with RSI (see below).
Relative Strength
A comparison of a share with a peer group or market index, made to determine whether the share outperforms or underperforms the peer group or market index. This is achieved by dividing the closing share price by the closing sector or market index value for each day and plotting the results as a line. Not be confused with RSI (see below).
Relative Strength Indicator (RSI)
A momentum indicator, used to determine whether a market is overbought or oversold. It is quoted on a scale of 0–100, with readings over 70 usually seen as overbought and readings under 30 seen as oversold. Its calculation is a comparison of points gained on up days with points lost on down days over a given number of previous price bars (usually 14 periods).
Resistance
A level where sellers are found. Usually plotted as a horizontal line touching previous highs. Can appear at psychological levels, i.e. big round numbers such as $10 or 10,000.
Retracement (Pullback)
A temporary fall/rise in a market against prevailing trend or to unwind overbought (o/b) or oversold (o/s) situation. Less dramatic than a reversal.
Rounding Bottom
A chart pattern showing gradual base formation and the turn to an uptrend. A good long-term base formation. See also Rounding Top.
Runaway or measuring gap
A gap that forms in the direction of an existing trend. The gap is called a measuring gap as these are seen to form midway through the eventual extent of the trend.
Selling Climax
The opposite of Buying Climax (see above).
Support
Psychological, fundamental or technical level that limits selling in a stock or market. Often described as a point where there are more buyers than sellers. Can appear as sideways support (bases or ranging markets) or uptrend support (rising markets).
Technical Analysis
The study of historical price action to determine future movements, usually with the use of charts.
Top Formation
Chart pattern indicating the end of an uptrend. Double tops, rounding tops and head and shoulder formations are examples.
Trend
The overall direction of a market or stock ignoring minor short-term fluctuations e.g. a bull / bear market. Identification of this is the most important concept in Technical Analysis. See Counter-Trend.
Trendline
A line connecting two or more points on the chart, defining the trend over the chosen timeframe. A rising trendline connects the low (within a chosen timeframe) to later lows that occur before the highest price within that timeframe and without cutting through previous price plots.
Volatility
The frequency and rate of change of an instrument. Often used as a theoretical measurement of risk. Volatility can be calculated statistically. Implied volatility is that given by the prices of options.
V-Reversal
Sudden rally, over 1-3 days, seen after a sharp fall. Can be a base formation. An example of this occurred in several markets in September 2001.