Glossary

Last: The most recent price in a given period, whether the period has ended or not. See Close.

LEAPS: Long-term options. These are often more sensitive to the underlying assumptions about volatility than to the price of the underlying asset. This often leads to complaints from those who bought LEAPS without understanding how they are priced.

Line Chart: A chart where the data points are connected by a line. Useful where a great deal of data is to be displayed or the data is characterized by a single point.

Liquidity: In essence, the ability to trade. The greater the liquidity, the easier it is to trade. For example, real estate is relatively illiquid, often taking 6 months or more to complete a transaction. On the other hand, high-volume stocks are relatively liquid-a typical transaction can be completed in seconds. The lower the liquidity, the higher the trading costs.

Log Scale: A chart scale that depicts equal-percentage changes rather than point changes for a given distance covered on the axis of a chart-especially useful on long-term charts. See Arithmetic Scale.

Long: The state of owning a security-as opposed to short.

Long Term: The major, generally multiyear, trend of markets. For our purposes, six months or longer. For capital gains purposes, 12 months or longer. May be adjusted to suit investor preferences.

Low: The lowest price recorded in a given period.

MACD: See Moving Average Convergence/Divergence.

McClellan Oscillator: A breadth oscillator that can be computed for any market that reports the number of advancing and declining issues-usually calculated for the NYSE. See Breadth.

Mean: The average value of a data series.

Median: The midpoint of a data series.

Mode: The most common element in a data series.

Momentum: Price change over a given time period, usually expressed in points or as a percent. For example, a very popular and useful momentum measure is the value of the NYSE index today minus the value of that same index 12 days ago. In physics, it is the first derivative. See Rate of Change.

Glossary

Monetary Indicators: Data series such as the Fed funds rate or the growth rate of the money supply that give a clue to the condition of the monetary environment.

Money Flow: Money flow is a much abused term. Three definitions are provided here to try and simplify things. See Money Flow I, Money Flow II, and Money Flow III.

Money Flow I: Any of a group of indicators designed to measure the ebb and flow of trading in a security by relating price action to volume. See Accumulation Distribution, Intraday Intensity, Money Flow, On Balance Volume, and Positive Volume Index.

Money Flow II (MFI): A volume-weighted version of Welles Wilders Relative Strength Index. Very useful.

Money Flow III: Originally developed by Don Worden, also known as tick volume. This is a mathematical assessment of trade-by-trade price and volume action. Current champions include Sam Hale and Lazlo Birinyi.

Moving Average: A measure of the average price (mean) of an item over the previous n periods that is recomputed each succeeding period using the most recent data.

Moving Average Convergence/Divergence (MACD): An indicator developed by Gerald Appel that compares the difference between a short average and a longer average. See Volume-Weighted MACD.

M-Type Top: A classic chart formation featuring two peaks loosely in the shape of the capital letter M. Often extended to three peaks. By far the most common reversal pattern at tops.

Multicollinearity: A trap in which several indicators seem to confirm each other, but really do not because they are each repeating the same message. A typical example of this is the use of several different momentum indicators.

Mutual Fund: An investment vehicle where many peoples funds are pooled together in pursuit of a common goal.

Negative Volume Index (NVI): An indicator based on the theory that important price action occurs on days when volume declines. It seems to us that you have to pick either this or the Positive Volume Index (PVI), but not both. We prefer the PVI. See Positive Volume Index.

Glossary

Net Bulls: A psychological indicator derived from the Investors Intelligence survey of investment advisory opinion by subtracting the percentage of bears in the survey from the percentage of bulls, while ignoring those in the correction camp. One of the best ways of assessing market sentiment.

Nonconfirmation: The situation that arises when price action is not echoed by indicator action. Most often a warning of an impending trend reversal.

Normal Distribution: The tendency for things to be distributed in a bell-shaped curve.

Normalized Capitalization: The percentile rank of a companys market value in relation to all other companies. A ranking of 100 is the biggest, and 0 the smallest.

Normalized Indicators: Indicators that have been adjusted to a normalized form using a mathematical transformation such as a stochastic or %b or adjusted by a common factor.

On Balance Volume (OBV): A volume indicator popularized by Joe Granville that looks to the sign of the daily change in its construction. It is a cumulative sum of the sign of the change times volume.

Open: The price of the first trade in a given period.

Open Arms Index: This is a version of the Arms Index that is created from averages of the components rather than the average of the index itself. The 10-day Open Arms Index is a useful market-timing tool that gives buy signals in the 1.10 to 1.20 area. The same result can be obtained by averaging the logs of the one-day Arms Index readings and then taking the antilog. See Arms Index.

Open-End Fund: A mutual fund that can be bought from or sold to the fund company at its net asset value.

Options: Financial contracts that confer the right but not the obligation to buy or sell a given security or index for a specified amount of time. Calls confer the right to buy and puts the right to sell.

Oscillator: An indicator that oscillates above and below a given value-usually 0-or one that is bounded between two values and is thus said to oscillate. As opposed to open-ended