Above the Market: A limit order to buy or sell a security for a specified price that is higher than the current market price. If the market does not reach the specified price, the order will go unfilled.
Accredited Investor: Term used by SEC in Regulation D of private placements. Concept: although 35 is the upper limit of persons who may purchase a private placement, accredited investors are not included in this number. General definition of accredited investors: institutional type accounts and persons of wealth (persons with a net worth of $1 Million or more, persons with annual income of $200,000 or more, persons who purchase $150,000 or more of the offering and this does not represent more than 20% of their net worth).
Accrued Interest: The amount of interest that has been earned since the last interest payment date. When a bond trades, the buyer pays the seller the accrued interest – a pro rata portion of the next interest payment, which will be paid to the buyer of the bond.
Accumulation: The act of buying more shares of a security without causing the price to increase significantly. After a decline, a stock may start to base and trade sideways for an extended period. While this base builds, well-informed traders and investors may seek to establish or increase existing long positions. In that case, the stock is said to have come under accumulation.
Advancing: A market stage of a stock that is characterized by an uptrend with subsequently higher highs and higher lows.
Adverse Excursion: The loss attributable to price movement against the position in any single trade.
After Hours: Any trade posting, adjusting, or changes made by specialists or member firm after the official close of the market.
Aggregate Exercise Price: Term in security options: the exercise (strike) price times the number of securities involved in the contract. For example, a call is purchased at $50 for 100 shares. The aggregate exercise price is $5000 ($50 x 100). Exception: GNMA options and T-Bill, T-Note, and T-Bond options, in which the aggregate exercise price is the strike price times the face value of the underlying contract.
Agricultural Commodities Index ($GKX): A weighted average of the important agricultural commodity contracts as compiled by Goldman Sachs. Commodities used include Wheat, Red Wheat, Corn, Soybeans, Cotton, Sugar, Coffee, Cocoa, and Orange Juice.
All or None: A type of order issued to a broker by a buyer or seller to fill the order completely or not at all. There are no partial transactions.
Alpha: A measure of the residual risk that an investor takes for investing in a fund rather than a market index. It represents the difference between a mutual fund’s actual performance and the performance that would be expected based on the level of risk taken by the fund’s manager. If a fund produced the expected return for the level of risk assumed, the fund would have an Alpha of zero. A positive Alpha indicates the manager produced a return greater than expected for the risk taken. A negative Alpha indicates the manager has not adequately rewarded investors for the risks taken.
American Depository Receipt (ADR): Securities issued by commercial banks that represent the shares of a foreign company. ADRs trade just like normal stocks on various US stock exchanges. Their performance usually parallels that of the parent company on its domestic exchange. StockCharts.com does not have access to ADR data.
AMEX: The term used for the American Stock Exchange.
AMEX Composite Index ($XAX): A weighted index of the stocks listed on the American Stock Exchange. The market capitalization of each company is used to construct the index.
Amex Index Options: The American Stock Exchange trades put and call options based on a number of sector, industry and international indices. These indices cannot be bought or sold like stocks, their price movements are simply used for trading options.
Amortization: The paying off of debt in regular installments over a period of time.
Analysis of Variance: A technique used to improve the analysis over regression techniques. It can be used for identifying relationships between predictor and criterion variables, whether the predictor variables are quantitative or qualitative in nature.
Analyst: A person with expertise in evaluating financial instruments; he or she performs investment research and makes recommendations to institutional and retail investors to buy, sell, or hold. Most analysts specialize in a single industry or business sector.
Andrew’s Pitchfork: Developed by Alan Andrews, this concept that uses three parallel lines drawn from three points that you select. The points selected to begin the pitchfork are usually three consecutive major peaks or troughs. The three parallel lines extending out to the right are used as normal support and resistance points.
Announcement Date: The date on which a company first publicly announces an impending stock split.
Annual Report: Popular term for the yearly report made by a company to its stockholders. Federal law requires all registered corporations to make such reports. They usually contain a balance sheet, an income statement, a list of changes in retained earnings, and how income of the corporation was used.
Annualized: The translation of periods of less than a year into an annual rate for comparative purposes. To annualize quarterly figures, you multiply them by four.
Arbitrage: The simultaneous buying and selling of securities to take advantage of price discrepancies. Arbitrage opportunities usually surface after a takeover offer.
Arithmetic (Linear) Scaling: On an Arithmetic (Linear) scale chart, the spacing between each point on the vertical scale is identical. Thus the vertical distance between 10 and 20 is the same as the vertical distance between 90 and 100. See ChartSchool article on price scaling.
Ask: Also known as the “offer”, the price that the market maker guarantees to fill a buy order. A buy order placed at the market will usually be filled at the current asking (offer) price. The ask price is usually greater than the bid price.
Assets: Any possessions that have value in an exchange.
At the Money: An option whose strike price is equal to the price of the underlying security.
Back Testing: A strategy that is optimized on historical data, then applied to current data to see if the results are similar. Rarely done properly and usually resorts to a form of curve fitting.
Bar Chart: A popular way to display and analyze financial price information in graphical form. The horizontal axis of a bar chart represents the passage of time with the most recent time periods on the right side while the vertical axis represents the stock’s price.
Barron’s Confidence Index: Weekly index prepared by the publishers of Barrons. Index compares yields of higher grade to lower grade corporate bonds. As yields on lower grade bonds fall, it shows that investors are more confident about the economy. Used for an insight into possible market sentiment about equity securities.
Basis: The difference between cash prices and the futures contract prices.
Bear: A person who believes prices will decline and might be described as having a “bearish” outlook. Bear markets occur when roughly 80% of all stocks decline for an extended period of time. 1973-74 and 1981-82 have been referred to as bear markets.
Bear Market: A long period of time when prices in the market are generally declining. It is often measured by a percentage decline of more than 20%.
Bear Spread: An option strategy with maximum profit when the price of the underlying securites decline. In futures, short the nearby future and long the deferred in anticipation of a decline in the general level of prices.
Below the Market: A limit order to buy or sell a security for a specific price that is lower than the current market price. If the market does not reach these prices, the order will go unfilled.
Beta: A measure of a security’s systematic or market risk. While most stocks move in in the same direction as the stock market, the level of the beta indicates the degree of correlation between a security and the market. The market is the benchmark and has a beta of 1.
Bid: The price at which the market maker guarantees to fill a sell order. A sell order placed at the market will usually be filled at the current bid price. The bid price is usually less than the ask price.
Black Box: A proprietary computerized trading system whose rules are not disclosed or readily accessible.
Block: A purchase or sale of a large number of shares or dollar value of bonds. Although the term is relative, 10,000 or more shares, or any quantity worth over $200,000 is generally considered a block.
Blue Chip Stock: A well known, public company that is thought to be in good financial shape and have sound fundamentals (profitability, earnings). An investment in a blue chip is regarded as a safe investment. Examples include Wal-Mart, Coca-Cola and General Electric.
Bond Price: Not to be confused with bond yield, it is the amount an investor pays to buy a bond. Bond prices and interest rates have an inverse relationship: when rates rise, bond prices fall; when rates decline, bond prices rise.
Bond Yield: The return an investor would earn if a bond was purchased and held to maturity. Usually, the longer the term of a bond, the higher the interest rate that’s paid to the holder, compensating for the inflation risk of having money tied up for a long time. To determine the yield, divide the interest rate by the purchase price of the bond.
Box Size: In Point & Figure charts, it is the price value of one “X” or “O”. An X is shown when prices rise by the box size, and an O is shown when prices fall by the box size. Increasing the box size filters smaller price movements.
Breadth: A comparison of the number of issues traded with the number of issues listed for trading. A measurement of the number of issues advancing versus the number of issues declining on a given day or as a moving average. Many measurements are used: advances divided by declines, as a percentage, advances minus declines as a net positive or negative number. The measurement consistently followed is an insight into investor sentiment and is used extensively by market analysts.
Bull: A person who believes prices will advance and might be described as having a “bullish” outlook. Bull markets occur when roughly 80% of all stocks advance over an extended period of time. 1982-87 and 1995-99 have been referred to as bull markets.
Bull Market: A long period of time when prices in the market are generally increasing.
Buy Signal: A condition that indicates a good time to buy a stock. The exact circumstances of the signal will be determined by the indicator that an analyst is using. For example, it’s considered a buy signal when the MACD crosses above its signal line.
Buy Stop: A buy order usually placed above the current price, ensuring that a security would have to trade at the set level before the buy order would be activated. at 35. By placing a buy stop order just above resistance, a trader can ensure that the security will break resistance before going long. On the other hand, traders looking to catch a bottom or intraday low might place a buy stop below the current price, but near support.
Buyback: A company’s repurchase of it’s own shares of stock.
Buying on Margin: A risky short-term strategy where a buyer borrows money from a broker to make an investment. The buyer believes the stock price will rise and is trying to maximize profits by investing more money in the stock.
Call Option: The right to buy a stock or commodity future at a given price before a given date. The owner of the call option is speculating that the price of the stock will go up and is therefore bullish.
Candlestick Chart: A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day’s price range. A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled). See ChartSchool article on Introduction to Candlesticks.
Capital Gain: The the profit derived from the selling price exceeding its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn’t been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain.
Carry Trade: Buying (or lending) a currency with a high interest rate and selling (or borrowing) a currency with a low interest rate. Traders looking to “earn carry” will buy a high-yielding currency while simultaneously selling a low-yielding currency.
CBOE Nasdaq Volatility Index ($VXN): The CBOE Nasdaq Volatility Index ($VXN) represents the implied volatility of a hypothetical 30-day option that is at the money, derived from a basket of put and call options.
Commodities: Raw materials such as gold, pork bellies, or orange juice. Traders in commodities buy and sell contracts (also called futures) for such materials.
Confirmation: A subsequent signal that validates a position stance. Traders and investors sometimes look for more than one signal or require validation before acting. For example: confirmation of a trend change may entail an advance past the previous reaction high. For an indicator such as MACD, confirmation of a divergence may be a subsequent moving average crossover.
Contingent Deferred Sales Charge (CDSC): A form of commission that is a back-end load on mutual funds that decline over time. For instance, if you sell mutual fund shares that have a CDSC after one year, you may owe a 4% charge, but if you hold for three years, the charge may decline to 2%.
Correction: After an advance, a decline that does not penetrate the low from which the advance began is known as a correction. Also referred to as a retracement, a correction usually retraces 1/3 to 2/3 of the previous advance.
CRB Index: An unweighted geometric average of some important commodities. It averages prices across 17 commodities and across time. The index tracks energy, grains, industrials, livestock, precious metals, and agriculturals.
Crossover: A point on a graph where two lines intersect. Depending on which lines they are, a crossover may indicate a buy or sell signal. For example, the price line crossing above a moving average line may generate a buy signal. Oscillators such as MACD and Chaikin Money Flow experience centerline crossovers. See our Chart School article on Centerline Crossovers.
Cyclical Stocks: Shares of companies that are highly sensitive to economic performance. Cyclical stocks tend to perform well when the economy is growing and suffer when the economy contracts. Chemical (Dupont), transportation (FDX Corp), auto (General Motors), paper (International Paper) and steel (Nucor) represent a few cyclical industries.
Day Trading: A style of trading where all positions are cleared before the end of the trading day. Contrast this with position trading, where stocks or securities may be held for longer periods.
Declining: A market stage of a stock that is characterized by a downtrend with subsequently lower highs and lower lows.
Distribution: The systematic selling of a security without significantly affecting the price. After an advance, a stock may start forming a top and trade sideways for an extended period. While this top forms, a security’s shares may experience distribution as well-informed traders or investors seek to unload positions. A quiet distribution period is usually subtle and not enough to put downward pressure on the price. More aggressive distribution will likely put downward pressure on prices.
Divergence: A situation that occurs when two lines on a chart move in opposite directions vertically. People often look for divergences by comparing a stock’s direction to the direction of its RSI, its MACD or its Stochastic Oscillator. There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher while the stock is declining. A negative divergence occurs when the indicator moves lower while the stock is rising.
Dow Jones Industrial Average ($INDU): The Dow Jones Industrial Average ($INDU) is a price-weighted average of 30 blue chip stocks published by Dow Jones & Co. Because it is price-weighted, stocks with the highest prices will have the most influence and those with the lowest, the least influence.
Dow Jones Transportation Average ($TRAN): The Dow Jones Transportation Average ($TRAN) consists of 20 stocks in the transportation business. Originally the index only included railroads; now airlines and trucking companies are included. According to the Dow Theory, a new major high in the DJIA should be confirmed by a new major high in this index before it is considered a reliable signal.
Dow Jones Utilities Average ($UTIL): The Dow Jones Utilities Average ($UTIL) is used as a surrogate for bond prices. The DJUA is often a leading indicator of broad market trends since these stocks are interest-rate sensitive. Utility companies typically have large amounts of debt on which they pay interest and hold cash for capital improvements, so they are affected by interest rate changes sooner than other industries.
Dow Theory: One of the oldest and most highly regarded technical theories. A Dow Theory buy signal is given when the Dow Industrial and Dow Transportation averages close above a prior rally peak. A sell signal is given when both averages close below a prior reaction low. See ChartSchool article on Dow Theory.
Energy Commodities Index ($GJX): The Energy Commodities Index ($GJX) charted by StockCharts.com is published by Goldman Sachs (http://www.gs.com/gsci/). The energy products listed include crude oil, heating oil, and natural gas.
ETF – Exchange Traded Fund: Collections of stocks that are bought and sold as a package on an exchange, principally the American Stock Exchange, but also the NYSE, CBOE, and Nasdaq.
Ex-Dividend Date: The first day of the ex-dividend period. If an investor does not own the stock before the ex-dividend date, they will be ineligible for the dividend payout. The exchanges automatically reduced the price of the stock by the amount of the dividend for all pending transactions that have not been completed by the ex-dividend date.
Extended (in price): A term describing a stock that has risen past its pivot point. Such a stock is considered a risky investment because it has already begun its advance and is more likely to reverse.
Fiat money: A currency that has no intrinsic value and is not backed by a physical commodity such as gold or silver. The currency’s only value is derived from its accepted use as a means of payment by the government.
Fibonacci Numbers: The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,…) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent, which is a popular Fibonacci retracement number. The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number. It is the ratio of the Fibonacci sequence that is important and valuable, not the actual numbers in the sequence.
Fundamental Analysis: A market analyst that relies on economic supply and demand information as opposed to focusing on charts and market indicators for a technical analysis. See Chart School article on Fundamental Analysis.
Futures: Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. These exchange-traded contracts require the delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date.
HOLDRs: These are HOLding Company Depository Receipts. Launched by Merrill Lynch, HOLDRs trade just like stocks on the American Stock Exchange. Each HOLDR is a basket of stocks designed to track the performance of a particular industry segment. For example, the Regional Bank HOLDRs (RKH) consist of stock from about 20 regional banks.
Implied Volatility: See Volatility (Implied).
Indicator: A value, usually derived from a stock’s price or volume, that an investor can use to try to anticipate future price movements. Indicators are divided into two groups: trend following or lagging and momentum or leading. Lagging indicators tell you what prices are doing now, or in the recent past, so they are useful when stocks are trending. A moving average is an example of a lagging indicator. Leading indicators are designed to anticipate future price action and many come in the form of oscillators. RSI is an example of a momentum indicator. See ChartSchool article on Introduction to Technical Indicators and Oscillators.
Industrial Metals Commodities Index ($GYX): The Industrial Metals Commodities Index ($GYX) charted by StockCharts.com is published by Goldman Sachs (http://www.gs.com/gsci/). The industrial metals listed include aluminum, copper, and zinc.
Industry: A grouping of companies in the same line of business. Industry groupings are more specific to the business than sector groupings. For example, the transportation sector includes airfreight, airline, trucking, railroad and shipping industry groups.
Initial Public Offering (IPO): The first offering of common stock to the public.
Intermarket Analysis: An additional aspect of market analysis that takes into consideration the price action of related market sectors. The four sectors are currencies, commodities, bonds, and stocks. International markets are also included. This approach is based on the premise that all markets are interrelated and impact on one another.
International WEBS: Equity securities that are designed to track the stock market performance of a specific country. In particular, they are designed to emulate the performance of a specific Morgan Stanley Capital International (MSCI) index. The MSCI indices are not actively managed country funds, but rather baskets of stocks intended to correspond with the general performance of a country’s stock market. For example, the Hong Kong WEB (EWH) is designed to correspond to the performance of the Hang Seng Index.
iShares: Developed by Barclays Global Investors, iShares are index funds that trade like stocks.
Laggard: An industry or company that is under performing the market.
Leader: An industry or company that is outperforming the market.
Limit Order: An order to buy or sell a security at a specific price. As opposed to a market order, limit orders might not be filled immediately if the market moves away from the specified price.
Line Chart: Price charts that connect the closing prices of a given market over a span of time that form a curving line on the chart. This type of chart is most useful with overlay or comparison charts that are commonly employed in intermarket analysis. It is also used for visual trend analysis of open end mutual funds.
Linear (Arithmetic) Scaling: On a linear (arithmetic) scale chart, the spacing between each point on the vertical scale is identical. Thus the vertical distance between 10 and 20 is the same as the vertical distance between 90 and 100. While this kind of scaling is intuitive and easy to recreate by hand, linear scaling should not be used on charts with large vertical ranges. A move from 10 to 20 is much better than a move from 90 to 100, but on a linear scale they both appear the same.
Liquidity: The ease with which a stock may be bought or sold in volume on the marketplace without causing dramatic price fluctuations. A highly liquid stock is characterized by a large volume of trading and a large pool of interested buyers and sellers.
Livestock Commodities Index ($GVX): The Livestock Commodities Index ($GVX) charted by StockCharts.com is published by Goldman Sachs (http://www.gs.com/gsci/). Cattle and hogs are the livestock included.
Logarithmic (Percentage) Scaling: On a logarithmic scale chart, the vertical spacing between two points corresponds to the percentage change between those numbers. Thus, on a log scale chart, the vertical distance between 10 and 20 (a 100% increase) is the same as the vertical distance between 50 and 100. Because these charts show percentage relationships, logarithmic scaling is also called “percentage” scaling. It is also called “semi-log” scaling because only one of the axes (the vertical one) is scaled logarithmically. See ChartSchool article on price scaling.
Market Capitalization: Also known as market cap, it is the total market value of a company (number of shares outstanding multiplied by the price of the stock). A company with 1 million shares outstanding and a stock price of $10 would have a market capitalization of $10 million.
Market Order: An order to buy or sell a security at the prevailing market price. Sometimes referred to as “at the market”, these orders are usually filled immediately by the market maker. A sell order placed at the market will most likely be filled at the bid price and a buy order will be filled at the ask price.
Multicollinearity: Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. One needs to be careful and not utilize technical indicators that reveal the same type of information. See ChartSchool article on Multicollinearity.
NASDAQ 100 Index ($NDX): The NASDAQ 100 Index ($NDX) tracks the 100 largest stocks listed by the Nasdaq Composite Index. It is the most widely traded Exchange Traded Fund (ETF) in the world, with 91 million shares moving each day. The NASDAQ 100 is often treated as an index of “tech stocks” simply because it’s components are mostly new technology companies.
NASDAQ Composite Index ($COMPQ): The NASDAQ Composite Index ($COMPQ) is a market capitalization-weighted index of over 5000 stocks. Because it is weighted by market capitalization, large companies such as Microsoft, Intel, WorldCom, Sun Microsystems, Dell Computer and Oracle dominate the index. With such large portion of the index dominated by technology stocks, the NASDAQ Composite is more a barometer for the technology sector than the broader market. The name “NASDAQ” is derived from the National Association of Securities Dealers Automated Quotation (System). For more information about the NASDAQ Composite, see the NASDAQ web site.
Net Asset Value (NAV): The dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day.
New Highs and New Lows: New highs refers to the number of stocks recording their highest price level in 52-weeks. New lows are the number of stocks recording their lowest price level in 52-weeks. Lists of stocks making new highs and new lows are available for the NYSE, Nasdaq and Amex. As an indicator, new highs and new lows are usually shown as moving averages to smooth the results and are often plotted together for easy comparison.
NYSE Composite Index ($NYA): The NYSE Composite Index ($NYA) is an index that measures the market value of all common stocks listed on the NYSE adjusted to account for capitalization changes, new stocks added to the list, and stocks removed from the list. Over 200 years old, the New York Stock Exchange is one of the oldest continuously operating exchanges in the world. It is associated with large-cap, blue chip stocks and is often used as a surrogate for the market as whole.
Offer: See Ask.
Open Interest: The number of options or futures contracts that are still unliquidated at the end of a trading day. A rise or fall in open interest shows that money is flowing into or out of a futures contract or option, respectively. In futures markets, rising open interest is considered good for the current trend. Open interest also measures liquidity.
Oscillator: An indicator that determines when a market is in an overbought or oversold condition. When the oscillator reaches an upper extreme, the market is overbought. When the oscillator line reaches a lower exteme, the market is oversold. See ChartSchool article on Oscillators.
Over The Counter (OTC): A securities market that is not geographically centralized like the trading floor of the NYSE. OTC securities are traded through a telephone and computer network.
Overbought: A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the Stochastic Oscillator exceeds 80 and when the Relative Strength Index (RSI) exceeds 70. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.
Oversold: A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp decline from 30 to 15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the Stochastic Oscillator is less than 20 and when the Relative Strength Index (RSI) is less than 30. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.
Paper Trade: A hypothetical trade that does not involve any monetary transactions. Paper trading is a risk-free way to learn the ropes of the market.
Penny Stock: A stock that usually sells for less than $1 per share, though the price may rise because of significant promotion. Penny stocks are very speculative and risky due to their lack of available information and poor liquidity.
Pivot Point: The point at which resistance disintegrates and the stock price begins to rise past the prior resistance level. This point can be considered the optimal time to buy as the bulls are gaining strength.
Point & Figure Chart: A type of chart consisting of columns of X’s (showing price rises) and O’s (showing price falls) arranged on a square grid. When the index increases, a rising column of black X’s is created – a rally. When the index falls, a descending column of red O’s appears – a decline. See ChartSchool article on Point & Figure Charts.
Point and Figure Buy Signal: P&F Buy and Sell signals are very simple patterns that should be confirmed before placing a trade. The P&F Buy signal is used when calculating the various Bullish Percent indices. When the last signal on the chart was a buy signal, that is, the last breakout was a column of Xs going higher than the previous column of Xs and no sell signal (no column of Os breaking below the previous column of Os) has happened since the buy signal.
Point and Figure Sell Signal: P&F Buy and Sell signals are very simple patterns that should be confirmed before placing a trade. The P&F Buy signal is used when calculating the various Bullish Percent indices. When the last signal on the chart was a sell signal, that is, the last breakout was a column of Os going lower than the previous column of Os and no buy signal (no column of Xs breaking above the previous column of Xs) has happened since the sell signal.
Position Trading: A style of trading characterized by holding open positions for an extended period of time. Contrast this with day trading, where a trader buys, then sells out of a position before the market closes that day.
Precious Metals Commodities Index ($GPX): The Precious Metals Commodities Index ($GPX) charted by StockCharts.com is published by Goldman Sachs (http://www.gs.com/gsci/). Gold, platinum, and silver are the listed metals.
Price Patterns: Patterns that appear on price charts possessing predictive values. Patterns are divided into reversal and continuation patterns. See ChartSchool articles on Chart Patterns.
Price Relative: A calculation that compares the performance of one security to another. It is often used to compare the performance of a particular stock to a market index, usually the S&P 500. See ChartSchool article on Price Relative.
Price/Earnings Ratio: The P/E ratio is figured by dividing the price of a stock by the company earnings per share. For example, a stock selling at $50, with earnings at $5 per share for the previous year, has a P/E ratio of 10 (50/5 = 10). This value is also called the multiple.
Proxy: A security or index whose correlation with another security or index is so strong that it is used as a substitute for the other. For example, General Electric has a very high correlation to the performance of the S&P 500. As GE goes, so goes the S&P 500. Therefore, GE can be used as a proxy for the S&P 500.
Put Option: The right to sell a stock or commodity future at a given price before a given date. The owner of the put option is speculating that the price of the stock will go down and is therefore bearish.
Q-Rank: See ChartSchool article on Rabbitt Q-Rank.
R Squared: The measure of diversification that determines how closely a particular fund’s performance parallels an appropriate market benchmark over a period. The market is understood to have an R Squared of 100%. Therefore, a fund with an R Squared of 95% contains 95% of the market’s diversification and risk. The remaining 5% is unique to the fund manager’s actions.
Rabbit Q-Rank: See ChartSchool article on Rabbit Q-Rank.
Range: The distance between the high price and the low price for a given time period. For example, the daily range is equal to the day’s high minus the same day’s low.
Ratio Analysis: The use of a ratio to compare the relative strength between any two entities. For example, an individual stock divided by the S&P 500 index can determine whether that stock is outperforming or under performing the stock market as a whole. A rising ratio indicates that the numerator in the ratio is outperforming the denominator. Trend analysis can be applied to the ratio line itself to determine important turning points.
Reaction High: An intermittent peak that forms as a security fluctuates. Whether a security is trending up, trending down or moving sideways, intermittent peaks and troughs form due to changes in supply and demand. Defining reaction highs usually depends on the minimum criteria set for time intervals and price movements.
Reaction Low: An intermittent trough that forms as a security fluctuates. Whether a security is trending up, trending down or moving sideways, intermittent peaks and troughs form due to changes in supply and demand. Defining reaction lows usually depends on the minimum criteria set for time intervals and price movements.
Reaction Rally: After a decline, an advance that does not surpass the high from which the decline began is known as a reaction rally. A reaction rally, also referred to as a retracement, typically retraces from 1/3 to 2/3 of the previous decline.
Resistance: Resistance is a price level at which there is a large enough supply of a stock available to cause a halt in an upward trend and turn the trend down. Resistance levels indicate the price at which most investors feel that prices will move lower. See ChartSchool article on Support and Resistance.
Retracement: A decline that retraces a portion of a previous advance, or an advance that retraces a portion of a previous decline. Retracements typically cover 1/3 to 2/3 of the previous move, and a retracement of more than 2/3 typically signals a trend reversal.
Reversal Amount: In Point & Figure charts, the reversal amount is the number of boxes required to be retraced to cause a reversal, and thus, a move to the next column and opposite direction. When a smaller reversal amount is set for the same data, reversals will be more frequent, and longer-term price trends will be more difficult to identify. Increasing the reversal amount removes columns corresponding to less significant trends.
Reverse Stock Split: A stock split which reduces the number of outstanding shares and increases the per-share price proportionately.
Reward-to-Risk Ratio: A calculation equal to the potential reward divided by the potential risk of a position. A long position entered at 100 with potential reward estimated at 120 and potential risk of 90 would have a reward-to-risk ratio of 20:10, or 2 to 1. Generally, a higher reward-to-risk ratio is a more appealing trade. For a long position, potential reward might be based on breakout projections, resistance levels or retracement estimates. Potential risk might be based on support levels, stop or loss requirements.
S & P 100 Index ($OEX): The S&P 100 Index ($OEX) is a market-capitalization weighted index consisting of 100 large blue chip stocks across various industries. Many fund managers use this index as a benchmark to measure the performance of large cap stocks overall. The market capitalization of the companies in the S&P 100 varies considerably, but in general large companies have a market cap greater than $5 billion dollars.
S & P Large Cap 500 Index ($SPX): The Standard and Poors (S&P) Large Cap 500 Index ($SPX) lists the 500 largest “large-cap” stocks (stocks from major companies in various industries). In 1999, companies in the Index ranged from $500 million to $400 billion in market capitalization.
S & P Mid Cap 400 Index ($MID): The Standard and Poors (S&P) Mid Cap 400 Index ($MID) lists 400 mid-size companies in various industries. According to S & P, it is a market-value weighted index. In 1999, the companies listed in the S & P 400 ranged from around $200 million to $10 billion in market capitalization.
S & P Small Cap 600 Index ($SML): The Standard and Poors (S&P) Small Cap 600 Index ($SML) lists 600 small-cap stocks, chosen for market size, liquidity, and to represent various industry groups. In 1999, the companies listed in the S & P 600 ranged from around $40 million to $2 billion in market capitalization.
Scan: A list of stocks, sorted and filtered according to criteria that vary with the scan.
Sector: A group of companies that generate revenue in similar ways, and tend to rise and fall with the economic cycle. Sectors are commonly broken down into smaller groups called industries. The sectors tracked by the Standard and Poors Index are Basic Industries, Financials, Technology, Industrials, Energy, Consumer Staples, Consumer Services, Utilities, and Transport/Cyclicals.
Securities and Exchange Commission (SEC): A federal agency created to regulate and monitor the securities industry. All U.S. companies with stock must abide by the SEC rules and regulations and are required to file quarterly status reports.
Sell Signal: A condition that indicates a good time to sell a stock. The exact circumstances of the signal will be determined by the indicator that an analyst is using. For example, it’s often considered a sell signal when the RSI crosses down through the 50 level.
Semi-Logarithmic (Percentage) Scaling: See Logarithmic Scaling.
Sentiment Indicators: Psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes.
Shakeout: A situation where many scared investors exit their positions due to unfavorable news or uncertainty regarding the stock or industry. The dot-com bust was characterized by numerous shakeouts causing many to abandon their dot-com positions, often at great losses.
Short Selling: The process of selling a stock with the hope of buying it back at a lower price (sell high, buy low). Short sellers are bearish and believe the price will decline. Short selling involves borrowing stock (usually from the broker) to sell short and using margin to finance the borrowing. If the price of the stock in question advances too far, the short seller will receive a margin call and be required to put up more money. A short squeeze occurs when the price advances so fast that short sellers are forced to cover their positions (buy the stock back), which drives prices even higher.
Size: The number of shares immediately available to buy (bid) or sell (ask). A bid of $54 with a size of 500 would indicate an order to buy 500 shares at $54. An ask of $55 with a size of 1000 would indicate an order to sell 1000 shares at $55.
Split: The division of a stock into multiple shares. In a 2-for-1 split, the stockholder’s shares will double in quantity, though the value of each stock will be halved. A stock split is usually an attempt to make high stock prices seem more attractive to investors and generally occurs in the face of new highs.
Spread: The difference between the bid and the ask. Generally speaking, more liquid (heavy volume) stocks usually have smaller bid/ask spreads. Less liquid stocks (light volume) usually have larger spreads. See related: bid, ask and size.
Standard Deviation (volatility): A statistical term that provides a good indication of volatility. It measures how widely values (closing prices for instance) are dispersed from the average. The larger the difference between the closing prices and the average price, the higher the standard deviation will be and the higher the volatility. The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility. See ChartSchool article on Standard Deviation (volatility).
Stop Loss Order: An instruction to the broker to buy or sell stock when it trades beyond a specified price. They serve to either protect your profits or limit your losses.
Support: A price level at which there is sufficient demand for a stock to cause a halt in an downward trend and turn the trend up. Support levels indicate the price at which most investors feel that prices will move higher. See ChartSchool article on Support and Resistance.
Swing Charting: A concept based on the use of a filter. Once prices have moved by the distance specified by this filter, a new line is drawn next to the previous one. In a nutshell, it is a chart that shows up and down price movement of a minimum size regardless of the time it takes. See our ChartSchool article on Swing Charting.
T-Bill: Also called Treasury Bills, they are short-term debt securities issued by the US government. Maturities are usually a year or less and typically run 13, 26 and 52 weeks. Trading in the secondary market, the price of T-Bills rises when interest rates fall and vice-versa.
Technical Analysis: The study of market action, usually with price charts, which includes volume and open interest patterns. Also called chart analysis, market analysis, and more recently, visual analysis. See ChartSchool article on Technical Analysis.
Top-Down Approach: An approach to market analysis used by both fundamental and technical analysts. It often begins with a more “macro” analysis of the overall market through major indices (S&P 500, Dow, NYSE etc.) before concentrating on the market at a more “micro” level. Strong and weak sectors of the market are analyzed before focusing on individual stocks within select groups.
Trailing Stop: A stop-loss level set above or below the current price that adjusts as the price fluctuates. For a long position, a trailing stop would be set below the current price and would rise as the price advances. Should the price decline and reach the trailing stop, then a stop-loss would be triggered and the position closed. As long as the price remains above the trailing stop, the position is held. Indicators such as the Parabolic SAR or moving averages can be used to set trailing stops.
Treasury Bill: See T-Bill.
Treasury Bond: A long-term debt security issued by the US government. Maturities are usually between 20 and 30 years, typically running 20 and 30 years. The 10-year Treasury Note is the benchmark security for US debt. Trading in the secondary market, the price of the Treasury Bonds rises when interest rates fall and declines when interest rates rise.
Treasury Note: Medium-term debt securities issued by the US government. Maturities are usually between 2 and 10 years, typically running 2, 5 and 10 years. The yield of the 10-year Treasury Note is commonly used as the benchmark interest rate. Trading in the secondary market, the price of the Treasury Notes rises when interest rates fall and declines when interest rates rise.
Triple Witching: An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. This phenomenon is sometimes referred to as “freaky Friday”.
Typical Price: The typical price is the average of the high, low and close. Typical Price = (High + Low + Close)/3.
Value Line Arithmetic Composite Average ($VLE): The Value Line Arithmetic Composite Average is an equally weighted price index of all stocks in the Value Line Investment Survey. It is referred to as “arithmetic” because the index is computed by finding the mean or simple average.
Value Line Geometric Composite Average ($XVG): The Value Line Geometric Composite Average is an equally weighted price index of all stocks in the Value Line Investment Survey. It is referred to as “geometric” because the index is computed by finding the geometric average. A geometric average is calculated by taking the nth root of the product of n terms.
Visual Analysis: A form of analysis that utilizes charts and market indicators to determine market direction.
Volatility: A measurement of change in price over a given period. It is usually expressed as a percentage and computed as the annualized standard deviation of the percentage change in daily price. The more volatile a stock or market, the more money an investor can gain (or lose!) in a short time.
Volatility (Implied): A key variable in most option pricing models, including the famous Black-Scholes Option Pricing Model. Other variables usually include: security price, strike price, risk-free rate of return and days to expiration. If all other variables are equal, the security with the highest volatility will have the highest option prices. Many Nasdaq and tech stocks have higher volatilities than NYSE and non-tech stocks, and their options are also priced accordingly. One method of measuring volatility is by finding the standard deviation of the underlying security. However, the standard deviation cannot always explain the volatility that is implied by an option’s price. Many times the price of an option will reflect more volatility than that measured by the standard deviation. This led to the notion of implied volatility, which is based on option prices. If the option price is known, then plugging in all variables and solving for volatility will yield the implied volatility.
Volatility Index ($VIX): The Market Volatility Index (VIX) measures the volatility of the market. A recent news story described it as “the options market’s gauge of investor fear.” Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there’s excess bearishness, and low numbers indicate excess bullishness. The VIX is updated intraday by the Chicago Board Options Exchange (CBOE), using Standard & Poors 500 Index (SPX) bid/ask quotes. It was created in 1993. See ChartSchool article on Volatility Index.
Volume: The number of trades in a security over a period of time. On a chart, volume is usually represented as a histogram (vertical bars) below the price chart. The NYSE and Nasdaq measure volume differently. For every buyer, there is a seller: 100 shares bought = 100 shares sold. The NYSE would count this as one trade and as 100 shares of volume. However, the Nasdaq would count each side of the trade and as 200 shares volume.
Wash Sale: The IRS defines a wash sale as “a sale of stock or securities at a loss within 30 days before or after you buy or acquire in a fully taxable trade, or acquire a contract or option to buy, substantially identical stock or securities.” The wash sale rule under Section 1091 of the Internal Revenue Code (IRC) is intended to prevent investors from generating and recognizing artificial losses in situations where they do not intend to reduce their holdings in the securities that are sold.
For purposes of Section 1091, wash sales occur when an investor realizes a loss on the sale of a security and the investor acquires a “substantially identical” security within a 61-day “window” that extends from 30 days before the date of the sale to 30 days after the date of the sale. If an investor sells the stock at a loss, and then buys a “substantially identical” replacement stock within this 61-day window, a wash sale occurs and the loss is deferred until the replacement shares are sold.
The pro rata loss is added to the cost basis of the replacement shares purchased, and the holding period of the replacement shares includes the holding period of the original shares sold. However, the deferred loss will eventually be recognized when the replacement shares are sold. For more information about the IRS and the wash sale rule, please see IRS Publication 550.
Weekly Reversal: An upside weekly reversal is present when prices open lower on Monday and then on Friday close above the previous week’s close. A downside weekly reversal opens the week higher but closes down by Friday.
Whipsaw: A whipsaw occurs when a buy or sell signal is reversed in a short time. Volatile markets and sensitive indicators can cause whipsaws. For example, a whipsaw would occur if a position trader initiates a long position on a bullish MACD crossover and has to close it the next day because of a bearish moving average crossover. The signal was reversed and the trader had to exit quickly.
Wilder, Welles: Developer of the RSI indicator and the Directional Movement Indicator (DMI) system.
Wilshire 5000 Total Market Index ($WLSH): Perhaps the broadest barometer of US stocks is the Wilshire 5000 Total Market Index ($WLSH). This index is made up of over 6500 companies from the NYSE, Amex and Nasdaq. The total market value of the index exceeded $14 trillion at the end of 2000. The index is weighted according to market capitalization and consists only of companies headquartered in the US. Whereas the NYSE, Amex and Nasdaq composite indices include preferred shares, ADRs and foreign issues, the Wilshire 5000 is a pure domestic index of common stocks.
Yield Curve: A plot of treasury yields across the various maturities at a specific point in time. At the front (left) of the yield curve are T-Bills with maturities of 12, 26 and 52 weeks. In the middle are Treasury Notes with maturities of 2, 5 and 10 years. At the end (right) of the yield curve are Treasury Bonds with maturities of 20 and 30 years. In a normal yield curve, yields rise as the maturities increase. If the yield on shorter maturities is higher than that of longer maturities, then an inverted yield curve exists. An inverted yield curve is a sign of tight money and is bearish for stocks.
Zig Zag: The Zig Zag overlay is a collection of straight lines that connect significant tops and bottoms on a price graph. It takes a single parameter that specifies the percentage that the price must move in order for a new “zig” or “zag” to appear. Zig Zag does not predict trends and should not be used on its own. See ChartSchool article on ZigZag.