• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL

Chapter 4. The Basics of Technical Analy... > More Technical Analysis Terminology

More Technical Analysis Terminology

Advance/Decline LineThe A/D Line is a measure of market breadth. It is simply the cumulative total of the Advancing/Declining Issues Indicator, which measures the number of advancing “issues” versus the number of declining “issues” on the NYSE.When more stocks are rising than falling, the A/D Line will be positive and vice versa. As such, it is a useful measure of market breadth. The Dow Jones Industrial Average (DJIA) is an index of just 30 stocks. While it is viewed as a total market bellwether, 30 stocks is hardly representative. The NASDAQ is weighted toward technology stocks, again, hardly a representative sample. Therefore, the Advance/Decline Indicator is seen as a useful tool to gauge market strength or weakness as a whole.
Bollinger BandsBollinger Bands are lines that are plotted at standard deviation levels above and below a moving average. Because standard deviation is a measure of volatility, Bollinger Bands are seen as self-adjusting (for volatility) and, when placed over a price chart, the basic interpretation is that the price will stay in between the two bands.Bollinger Bands will expand during high volatility times and contract during phases of low volatility. Some observations have shown that sharp price movements can be expected when the bands have tightened to extreme levels. There are a number of other observations, which we won’t go into here. For more information on Bollinger Bands, take a look at the tutorial on the Web site: www.bollingerbands.com.
MomentumMomentum is a measure of how much a security’s price has changed over a given time span. 
Standard DeviationStandard Deviation (SD) is a statistical measure of volatility. In Technical Analysis, it is typically used as a component part for other indicators, such as Bollinger Bands.High SD values will occur when prices have been moving dramatically and vice versa. Watch out for major tops and bottoms to coincide with high levels of volatility.
Put/Call RatioAnother measure of market breadth and a contrarian indicator, the P/C ratio reflects the number of puts and calls bought on the CBOE. The indicator assumes that put buyers are bearish and call buyers are bullish. Later you’ll see that this is not always necessarily the case, given that calls and puts can be bought and sold in different combinations to set up hedged trades.The higher the P/C ratio, the more bearish the market is feeling. As a contrarian indicator, you might interpret a high P/C ratio as a good time to buy. Obviously, you’d combine this indicator with others.
New Highs/New LowsThis indicator displays the number of stocks making 52-week highs against the number making 52-week lows. 
On Balance VolumeOBV is a measure of volume but assumes that on an up day, all the volume is up volume and on a down day all the volume is down volume. The theory is that OBV is a leading indicator in that it shows where the smart money is flowing before prices confirm the move. A price surge without the requisite OBV move would be considered as unconfirmed. 
Open InterestOpen Interest is simply the number of options or futures contracts unexercised or open at a given point in time. An open contract is simply one that has not been exercised, closed out, or allowed to expire. Open Interest increases when two parties enter into a new options or futures contract (remember there are always two parties to a trade) and decreases if the existing contract is liquidated.In its own right open interest is purely a measure of liquidity or, rather, activity in a particular underlying security’s options or futures series. Some followers believe that rising open interest coupled with rising volume is a confirmation of the current trend direction. On the other hand, falling volume and falling Open Interest is thought to be a sign that the current trend is about to reverse.
VIXThe VIX is a volatility index as measured from the Standard and Poors 100 index.Generally when the market is rising, the VIX will be low, but when prices are experiencing fast falls the VIX will be high, reflecting increased panic among traders and investors. Contrarian traders look at the VIX for a guide to investor sentiment. They surmise that when the VIX is high most of the sellers will have left the market, and so it may be a good time to buy. Hence the expression, “When the VIX is high, time to buy; when the VIX is low, time to go.”
12-month highThe highest price reached by the stock in the last 12 months. 
12-month lowThe lowest price reached by the stock in the last 12 months. 

This list is simply an outline of the better-known technical indicators and is by no means exhaustive. There are any number of Web sites containing detailed descriptions of many technical indicators and chart patterns. Try out www.stockcharts.com for a start.



Not a subscriber?

Start A Free Trial

  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint