Glossary

involves two pushes down, the second of which is said to retest the lows established by the first.

Breadth: The number of stocks on an exchange participating in a move. If the number is a large proportion of the total, breadth is said to be good and the move well supported. If the number of issues participating is small, the market is considered thin and sustainability comes into question.

Breakout: A price move that carries prices above a resistance area. Especially a move that ends a trading range. (A breakdown is the same, but carries prices lower rather than higher.)

Bull Market: A sustained period of advancing prices.

Call Option: An option that gives the right, but not the obligation, to the holder to purchase a security at a specific price for a specific period. See Put Option.

Candlestick Chart: A Japanese approach to charting in which the relationship of the opening and closing prices governs the color of the body of the "candle" used to depict price action on a chart. These charts can provide substantial insight, especially when the picture is not clear using traditional Western methods. EquityTrader.com uses a form of candlesticks in which the portion of the bar between the open and the close is colored green if the close was higher or red if the close was lower. See Bollinger Bars.

Capitalization: The market value of a company-the number of shares outstanding times the last price.

Channels: Areas on a chart where prices trade for an extended period between parallel trend lines. They may be rising, flat, or falling. Channels are most demarked by connecting two or more significant highs or lows and then drawing a parallel line on the opposite side of the formation. Channels may also be drawn around a central line such as a linear-regression line.

ChartCraft: A famous point-and-figure advisory service founded by Abe Cohen.

Close: The final price in a given period. See Last.

Closed-End Fund: A mutual fund traded on an exchange. May trade at a premium or discount to its net asset value.

Commissions: The costs of doing a trade exacted by brokers in return for their services.

Glossary

Confirmation: The state of the market where prices and indicators agree and are therefore said to confirm one another. See Multicollinearity.

Congestion Phase: A phase that follows an advance or decline in which prices trade within a narrow range. A trendless period. See Pivot.

Consolidation: A pause to refresh after a strong move. Also known as a pivot, because the relative-strength line of a strong stock will flatten or even turn down a bit during a consolidation.

Contrary Opinion: The theory originated by Humphrey Neil that suggests you should go against the crowd. That is, if all are bullish, you should consider the bearish case carefully and vice versa. A very powerful investment approach that works best when extremes are reached.

Convergence: A situation in which trend lines meet or cross- now or in the future. See Divergence.

Coppock Curve: A front-weighted averaging technique developed by E. S. C. Coppock, publisher of the classic investment letter Trendex. The original Coppock curve used monthly data. Mr. Coppock was the leading exponent of the this-stuff-is-simply-too-good-for-the-likes-of-you approach to investment-letter writing.

Correction: A countermove within the context of a trend that does

not break the trend. Crossover: A signal created when price crosses a threshold,

typically a moving average. Cycle: A regularly occurring event. The four-year presidential

cycle is the best example of this in the stock market. There can

be volatility cycles too, for example, the 19-day volatility cycle

in Treasury bonds. Deflation: A period in which prices decline. In its more severe

forms, deflation is characterized by a contraction in purchasing

power as well.

Departure Graph: A graph of the difference of two moving averages, one shorter than the other. Used to measure momentum, departure graphs are the precursors to MACD.

Disinflation: A move toward price stability after an inflation.

Glossary

Distribution: The process of selling by smart investors, "strong hands," to less astute investors, or "weak hands." It is said to occur at market tops in anticipation of a decline.

Divergence: A state in which trend lines will not meet in the future. For example, if a trend line fit to price is rising and a trend line fit to an indicator is falling, these lines will not cross, no matter how far they are extended into the future. Thus they are said to diverge. If the two lines bear a meaningful relationship to one another, the result is a bearish forecast. See Convergence.

Downside: The maximum expected decline in price. Usually considered in a risk-reward evaluation. See Upside.

Downtrend: A state in which prices are steadily declining, usually as demarked by a channel. A downtrend is known as a bear market if it is a primary move.

Double Bottom: A bottom formation characterized by an initial low that is successfully retested to complete the formation.

Double Top: A top formation characterized by an initial high followed by a pullback and a try at a subsequent high that fails.

Elliott Wave: A theory developed by R. N. Elliott that all market activity develops in well-ordered patterns consisting of five primary waves and a three-wave correction. These patterns are thought to be nested; any wave can be broken down into a structure similar to its parent. This self-symmetry points toward a fractal quality for the markets which later researchers have corroborated. The Elliott wave and the work of W. D. Gann are the prime examples of the internal-structure approach to the markets. It is thought that these approaches are the keys to great riches. In practice, they explain all that has been extremely eloquently, but little of what will be.

Envelopes: Lines constructed around the price structure without reference to a measure of central tendency such as a moving average that define, on a relative basis, whether prices are high or low. See Bands and Channels.

EquiVolume: A charting approach in which the x axis is volume instead of time. The approach was developed by Edwin S. Quinn of Investographs and is currently championed by Richard Arms of Arms Index fame. This alternative approach