Western Glossary

Steve Nison's aid to western technical indicators

A/D Line: A popular indicator that measures the breath of the stock market advance or decline where the number of advancing issues is compared to the number declining issues. The A/D line is usually compared to popular index such as the Dow Jones. The market and the A/D line should trend in the same direction.

Arms Index: Also called the TRIN index, this indicator is a ratio of the average volume of declining stocks divided by the average volume of advancing stocks. Reading below 1.0 indicates more volume in rising stocks. A reading above 1.0 indicates more volume in declining stocks. A 10 day average of the arms index over 1.20 is oversold and under .70 is overbought.

Ascending Triangle: A sideways price pattern where the resistance line is horizontal while the support line is ascending. A break over the resistance area is viewed as bullish.

Average Directional Movement Index (ADX): Technical indicator which quantifies the strength of the prevailing trend. The higher the ADX,the stronger the trend. A falling ADX indicates the trend is weakening.

Blow-Offs (also called Selling or Buying Climaxes): A top or bottom reversal. Blow-offs occur after an extended move. Prices sharply and quickly thrust strongly in the direction of the preceding trend and then suddenly turn in the opposite direction, usually on high volume.

Bollinger Bands: A popular indicator that plots two bands above the below a 20 period moving average. The bands are usually two standard deviations above and below this 20 period moving average. The top and bottom bands define potential support and resistance areas.

Box Range: The Japanese term for a market in a lateral trading range. See Congestion zone or band.

Breakaway Gap:When prices gap away from a significant technical area (i.e., a trendline or a congestion zone).

Breakout: Overcoming a resistance or support level.

Change of Polarity: When old support converts to new resistance or when old resistance converts to new support.

Channel Line: When prices travel between two parallel lines, the trendline and the channel line. A break of the channel line signals an acceleation of the existing trend. In addition, it is generally thought that a failure to reach one side of the channel tends to increase the chances of a break of the opposite side of the channel.

Confirmation: When more than one indicator substantiates the action of another.

Congestion Zone or Band: A period of lateral price action with a relatively narrow price band. The Japanese call this a box range.

Consolidation: The same as a congestion zone. Consolidation, however, has the implication that the prior trend should resume.

Continuation Pattern: A pattern whose implications are for a continuation of the prior trend. A flag, for instance, is a continuation pattern.

Crack and Snap: When prices break under the support of a horizontal congestion band and then springs back above the "broken support" area. This is bullish and there is a measured price target to the upper end of the congestion band.

Crossover: When the faster indicator crosses above (bullish crossover) or below (bearish crossover) the slower indicator. For example, if a 5-day moving average crosses under a 13-day moving average, it is a bearish crossover.

Descending Triangle: A variation of the symmetrical triangle where the resistance line is descending while the support line is horizontal. A break under the support area is viewed as bearish.

Divergence: When related technical indicators fail to confirm a price move. For instance, if prices reach new highs and stochastics do not, this is negative divergence and is bearish. If prices establish new lows and stochastics do not make new lows, this is called positive divergence and is bullish.

Double Bottom: Price action that resembles a W in which price declines stop at, or near, the same lows twice.

Double Top: Price action that resembles an M in which price rallies stop at, or near, the same highs twice .

Dow Theory: One of the oldest technical theories. Its main components include, the average discount everything, the market is comprised of the trend, primary trend had three phases and the averages must confirm one another.

Downgap: When prices gap lower.

Downtrend: A market that is trending lower as shown by a series of lower highs and/or lower lows.

Falling Resistance Line: A resistance line made by joining a series of lower highs.

Falling Off the Roof: When prices break above a resistance line from a lateral trading zone, but this move to new highs fails to hold and prices pull back under the "broken" resistance line. The target is for a retest of the lower end of the recent trading zone.

Falling Support Line: A support line obtained by connecting a series of lower lows.

Fibonacci Numbers: A series of numbers derived by adding the previous number to the current number. The numbers begin 1,1,2,3,5,8,13,21….Popular Fibonacci ratios used by technicians include (rounding off) 38%, 50% and 62%.

Flag or Pennant: A continuation formation comprised of a sharp price move followed by a brief consolidation area. These are continuation patterns.

Gap: A price void (i.e., no trading), from one price area to another. (Referred to as a "window" in candlestick charting terms).

Head and Shoulders Top: A top reversal pattern resembling a head (with the highest peak) and two shoulders (lower peaks). If the price penetrates the line that connects the low points of the head (called the neckline), the pattern is completed.

Inside Session: When the entire session's high-low range is within the prior session's range.

Intraday: Any period shorter than daily. Thus, a 60-minute intraday chart is based on the high, low, open, and "close" on an hourly basis.

Inverted Head and Shoulders: The mirror image of the head and shoulders top. This bottom reversal pattern resembles a head (with the lowest bottom) and two shoulders (higher bottoms). If the price penetrates the line that connects the highs points of the head (called the neckline), the pattern is completed. Volume tends to be a more important factor in the formation of an inverted head and shoulders pattern.

Islands: A formation at the extremes of the market when prices gap in the direction of the prior trend. Prices then stay there for one or more days, and then gaps in the opposite direction. Prices are thus surrounded by gaps that leave them isolated like an island.

Measured Moves: A price target based on using measurements formulated on prior price action.

Momentum: The velocity of a price move. It compares the most recent close to the close a specific number of periods ago.

Moving Average: A trend following indicator that is usually used in trending markets. It shows the average value of securities price over a period of time, for example a simple five-day moving average adds the last five days closing prices and divides the total by 5. There are simple, weighted and exponential moving averages.

Moving Average Oscillator: An oscialltor which compares two moving averages of different time periods.

Moving Average Convergence/Divergence (MACD) Oscillator: A combination of three exponentially smoothed moving averages.

Neckline: A line connecting the lows of the head in a head and shoulders formation, or the highs of an inverse head and shoulders. A move under the neckline of a head and shoulders top is bearish; a move above the neckline of an inverse head and shoulders neckline is bullish.

Negative Divergence: See Divergence.

Open Interest: The number of open contracts at the end of the trading session. For every long, there is a short. As such, the number of outstanding long contracts is equal to the number of outstanding short contracts.

Oscillator: A momentum line that fluctuates around a zero value line (or between 0% and 100%). Oscillators can help measure overbought/oversold levels, show negative and positive divergence, and measure a price move's velocity.

Outside Reversal Session: (Also called a key reversal). In an uptrend, this is when prices make a new high for the move and then closes that session under the prior session’s close. In a downtrend, an outside reversal session is when the market makes a new low for the move and then closes that session above the prior session’s close.

Overbought: When the market moves up too far, too fast. At this point the market is vulnerable to a downward correction.

Oversold: When the market declines too quickly. The market becomes susceptible to a bounce.

Paper Trading: Not trading with real money. All transactions are only imaginary with a record of profit and loss on paper.

Pennant: See Flag.

Pivot High: A high that is higher than the highs which surround it.

Pivot Low: A low that is lower than the lows which surround it.

Positive divergence: See Divergence.

Rally: An upward movement of prices.

Reaction: A price movement opposite of the prevailing trend.

Relative Strength Index (RSI): The RSI compares the ratio of up closes to down closes over a specified time period.

Resistance Level: A level where sellers are expected to enter.

Retracement: A price reaction from the prior move in percent-age terms. The more common retracement levels are 38.2%, 50%, and 61.8%.

Reversal Indicator: See Trend reversals.

Reversal Session: A session when a new high is made for the move and the market then closes under the prior session's close.

Rising Resistance Line: A resistance line made by connecting higher highs.

Rising Support Line: A support line connecting higher lows.

Rounded Top/Bottom (also called Saucer Tops/Bottoms): A reversal pattern characterized by a gradual shift from down to sideways to up or up to sideways to down. Resembles a saucer.

Selling Climax: When prices push sharply and suddenly lower on heavy volume after an extended decline. If the market reverses from this sharp sell-off, it is viewed as a selling climax.

Selloff: A downward movement of prices.

Simple Moving Average: A method of smoothing price data in which prices are added together and then averaged. It is a "moving" average because the average moves. As new price data is added, the oldest data is dropped.

Spring: When prices break under the support of a horizontal congestion band and then springs back above the "broken support" area. This is bullish and there is a measured price target to the upper end of the congestion band.

Stochastics: An oscillator that measures the relative position of the closing price as compared with its range over a chosen period. It is comprised of the faster moving %K line and the slower moving %D line.

Support Level: An area where buyers are expected to enter.

Swing Target: Using the distance of a rally or decline to obtain a price target.

Symmetrical Triangle: A price pattern in the shape of a symmetrical triangle. This is normally a continuation pattern, meaning the resolution of the triangle should occur in the direction of the trend which preceded it.

Trading Range: When prices are locked between horizontal support and horizontal resistance levels.

Trend: The market's prevalent price direction. There are short-term, intermediate-term and long-term trends.

Trendline: A line on a chart that connects a series of higher highs or lower lows. At least two points are needed to draw a trend line. The more often it is tested and the greater the volume on the tests, the more important the trend line.

Trend Reversals: Also called reversal indicators. This is a misleading term. More appropriate, and more accurate, would be the term "trend change indicator." It means the prior trend should change. It does not mean prices are going to reverse. Prices might reverse after a trend reversal pattern, but they may not. For example, the trend could change from upwards to sideways. As long as the trend changes after a trend reversal pattern appears, that trend reversal worked. Thus, if a trend reversal appears during an uptrend and the market then trades sideways, the trend reversal pattern was successful.

Up Gap: A gap that pushes prices higher.

Upthrust: When prices break above a resistance line from a laterally trading zone. If these new highs fail to hold and prices pull back under the "broken" resistance line, it is an upthrust. The target is for a retest of the lower end of the recent trading zone.

Uptrend: A market that is trending higher.

V Bottom or Top: When prices suddenly reverse direction, forming a price pattern that looks like the letter V for a bottom or an inverted V for a top.

Volume: The total of all contracts traded for a given period.