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76

Glossary

indicators that may rise and fall as they please. Often a given indicator may come in both forms.

Overbought: Currently the state of a price having risen too far, too fast. In former times, the word had more climactic implications.

Oversold: The opposite of overbought.

Pairs: The mating of securities having opposing qualities-often a hedge fund strategy.

%b: An indicator derived from the position of the last data point in relation to Bollinger Bands. %b equals 1.0 at the upper band, .5 at the middle band, and 0 at the lower band. The formula is (last - lower Bollinger Band)/(upper Bollinger Band - lower Bollinger Band).

Persistence: The percentage of days in the last n days in which an indicator was positive. Typically used with Intraday Intensity where persistence is the percentage of days in the past six months for which the money flow measure was positive.

Pivot: A consolidation by a strong stock in which its relative-strength line goes flat, followed by a resumption of the trend. In addition, a reaction signal generated after a PowerShift.

Point and Figure: A type of chart that records only price action without reference to time. See Bollinger Boxes.

Point-and-Figure Swing: The direction of the current move as depicted by point-and-figure rules. The direction of the last point-and-figure reversal.

Positive Volume Index (PVI): An indicator based on the theory that days when the volume increases are important. It is an accumulation of price change on days when volume expands versus the prior day. See Negative Volume Index.

PowerShift: A technical signal that arises from an oversold or overbought condition when sufficient strength or weakness to break the trend is detected. (See www.EquityTrader.com.)

Price Filters: Mathematical tools designed to clarify patterns by reducing short-term noise.

Psychological or Sentiment Indicators: Data pertaining to the attitudes and feelings of market participants. Surveys regarding bullish or bearish sentiment or counts of bullish and bearish bets in the options market are typical examples. The most famous are



Glossary

the Investors Intelligence poll of investment advisers and the put-call ratio. These indicators are to be treated in a contrarian manner at the extremes.

Pullback: Price movement against the primary trend that does not interrupt that trend.

Put-Call Ratio: Attributed to Marty Zweig, a sentiment indicator derived from options trading.

Put Option: An option that confers the right, but not the obligation, to sell a security at a given price for a given time. See Call Option.

Pyramid: A hierarchical stock market structure consisting of four layers: Stocks are at the lowest level, industry groups are next, market sectors are next, and the markets at the peak. Currently Group Power contains 3700 stocks organized into 150 groups, 13 sectors, and 1 market in its pyramid.

Rate of Change: Price change over a given period usually expressed as a percentage. For example, the 12-day rate of change of the NYSE Composite is thought to be a good overbought-oversold indicator for the market. This is a component of our Market Model. See Momentum.

Rational Analysis: The juncture of the sets of technical analysis and fundamental analysis.

Rational Groups: Collections of stocks that have common business characteristics and similar trading patterns; the basis of Group Power.

Reaction: See Correction.

Relative Strength: Relative strength is the relationship of an item to an index or to a basket of items. At its simplest, the relative-strength line is the price of a stock divided by the price of the S&P 500. A bit more complex would be a relative-strength ranking where the price action of an item over a given period is compared with the price action of the other items in the universe over the same period.

Relative Strength Index (RSI): Created by Welles Wilder. An indicator that compares the action of a security on the days on which it rose with the action of the same security on the days on which it fell. In effect, a ratio of a securitys strength to its weakness. See Money Flow II.



Glossary

Resistance Area: An area on a chart above current prices where identifiable trading has occurred before. It is thought that investors who bought at those higher prices will become sellers when those prices are reached again, thus halting an advance.

Retracement: A minor move against the main trend that "retraces" some of the prior move. The giveback of a portion of a primary move. Key retracement levels are considered to be one-third, one-half, and two-thirds of the prior move. Many people use Fibonacci numbers to calculate retracement targets.

Risk-Adjusted Return: The annualized return of a security divided by negative beta if negative beta is greater than 1. Essentially, annualized return penalized by downside volatility.

Sectors: Aggregations of industry groups with common economic themes. Basic materials and technology are good examples of sectors.

Securities: Investments that can be bought and sold as small portions of the whole-a share of stock in a company or a bond, for example.

Sell on the News: The idea that once good news, especially heavily anticipated good news, is out, it is best to sell, as profit taking is bound to occur. A variation is the concept that once the news is out, there is little to propel the stock higher. The trading-floor cynic says, "Buy on the rumor. Sell on the news."

Setback: A temporary decline, as in the decline often seen after good news.

Setup: A combination of factors that leads to a trade with a high probability of success. For example, a band tag accompanied by a nonconfirmation from an indicator or a W bottom.

Short: The state of being short a security. The act of selling before buying, thus a bet on prices falling. The trading-floor cynic says, "He who sells what isn hisn must buy it back or go to prisn."

Short Covering: The closing side of a short transaction. Often said to help prices move higher in a hurry, as short sellers desperate to close their positions pay any price for the privilege of doing so.



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