TECHNICAL ANALYSIS

AMIT AGARWAL
BEN GRAHAM SCHOOLOF FINANCE www.ben-school.com
Founder & Mentor

1. What is Technical analysis?

Technical analysis is the study of stock price behavior by analyzing its chart. Technical analysis is done to uncover trends in stock and market in general. Technical analysis helps in taking advantage of trends. With this the investors have the opportunity to enter as well as hold profitable positions in stocks on the move.

2. Fundamental Analysis vs. Technical Analysis

Fundamental analysis seeks to determine a future stock price by understanding and measuring the objective value of equity. In contrast the study of stock charts, known as technical analysis, is based on the belief that the past action of the market itself will determine the future course of prices. Technical analysts try to forecast short term shifts in supply and demand that will affect the market price of a security and ignore any firm related, or economy related information as fundamentalists do. Technical analysis is useful for only short term investors, while fundamental analysis is useful for long term investors. A fundamentalist believes that long term security values can be gauged by studying the main factors related to the firm, the industry and the economy. While on the other hand a technical analyst works on the premise that short term price movements can be predicted on the basis of price-volume study, chart patterns of individual stocks and other technical market indicators

The above comparisons are given to better understand the role of each type of analysis, but that doesnt mean that they are mutually exclusive and should be used in isolation only. Rather these two fields of analysis compliment each other and can be used together to achieve better results. One must go for a share which is fundamentally strong and then determine the timing of your buying or selling the shares on the basis of technical analysis. To understand this concept of using both these analysis together, lets consider the following example: Say a stock named XYZ is available at a current market price of 100. By fundamental analysis you arrive at fair value of XYZ at 70, at which this stock would be a considered as good investment. Now suppose the stock started correcting after 2 months and came down to the price of 70.

Now if you understand the technical analysis as well then you wont rush to buy the stock just because it has come down to 70. Rather you will do a quick technical analysis to check whether there is some more downside left in the stock or not. If the technical indicators suggest that there is some more momentum left in the stock on the negative side then you would wait for some more time and only start buying the stock at a price where the technical indicators start suggesting that the selling pressure has relatively come down and there is not much downside left in the stock from that level or price. Same technique can be used while selling the stocks you own. Technical analysis helps you in getting more return out of your investment just by utilizing the momentum in either direction. In summary when technical analysis is used in conjunction with fundamental analysis the return on your investment can be maximized.

3. Evolution of Technical Analysis

Technical analysis was conceptualized by Dow Jones, the editor of wall street Journal. While recording price movements of various securities, he observed that most stocks move in tandem with the market, going up when the market goes up and vice versa. In order to interpret market behavior, Dow constructed two indices called Dow Jones Industrial Average (DJIA), and Dow Jones Transportation average (DJTA). He proposed a theory called Dow Theory which is very popular today and almost technical analysis revolves around this theory.

4. Rationale of Technical Analysis

Technical analysis believes that it is possible to forecast the future price of a share by looking at the past price movements. Their main assumptions are: 1. The market price of a security is determined solely by supply and demand. Any shift in the supply demand relationship, can be detected sooner or later in the action of the market 2. Supply and demand are governed by numerous factors relied upon by fundamentalists, as well as opinions, moods guesses and blind necessities. 3. Disregarding minor price movements stock prices tend to move in trend that persists for an appreciable length of time.

4. Some chart patterns tend to recur and their recurring prices can be used to forecast the price movement.

5. DOW THEORY
The Dow Theory says that the market has three simultaneous movements. The most important movement is called the primary trend, which is a broad upward or downward movement lasting usually for few years. A secondary movement is called technical correction. This is a much shorter in duration and is opposite in direction to the primary trend. Actually a technical correction is the intermediate reaction to the primary trend such as sudden decline in bull market or a sudden rise in bear market. Such interruption can last for 3 weeks to 3 months and usually retraces 1/3 to 2/3 of the previous advance in bull market or 1/3 to 2/3 of the previous decline in bear market. I addition to above two trend there is another trend known as Tertiary trend which is due to daily fluctuation, and is not considered important by the Dow Theory. As mentioned earlier, the Dow Theory seeks to detect the primary trend and assumes that the stock prices have a momentum of their own by which prices tend to maintain the same direction, once it achieves a primary trend. The Dow Theory says that if the market index movement is such that all successive peaks are ascending and all successive bottoms are also ascending, then there exists a primary up trend. Conversely, if the successive peaks and successive bottoms show a downward slide, it signals a major downtrend.

6. Technical analysis tools 6.1. Moving averages

Among the most popular technical indicators, moving averages are used to gauge the direction of the current trend. Every type of moving average is a mathematical result that is calculated by averaging a number of past data points. Once determined, the resulting average is then plotted onto a chart in order to allow traders to look at smoothed data rather than focusing on the day-to-day price fluctuations that are inherent in all financial markets. The simplest form of a moving average, appropriately known as a simple moving average (SMA), is calculated by taking the arithmetic mean of a given set of values. For example, to calculate a basic 10-day moving average you would add up the closing prices from the past 10 days and then divide the result by 10. In Figure 1, the sum of the

prices for the past 10 days (110) is divided by the number of days (10) to arrive at the 10-day average. If a trader wishes to see a 50-day average instead, the same type of calculation would be made, but it would include the prices over the past 50 days. The resulting average below (11) takes into account the past 10 data points in order to give traders an idea of how an asset is priced relative to the past 10 days.

Perhaps you're wondering why technical traders call this tool a "moving" average and not just a regular mean. The answer is that as new values become available, the oldest data points must be dropped from the set and new data points must come in to replace them. Thus, the data set is constantly "moving" to account for new data as it becomes available. This method of calculation ensures that only the current information is being accounted for. In Figure 2, once the new value of 5 is added to the set, the red box (representing the past 10 data points) moves to the right and the last value of 15 is dropped from the calculation. Because the relatively small value of 5 replaces the high value of 15, you would expect to see the average of the data set decrease, which it does, in this case from 11 to 10.

Once the values of the MA have been calculated, they are plotted onto a chart and then connected to create a moving average line. As you can see in the following Figure, it is possible to add more than one moving average to any chart by adjusting the number of time periods used in the calculation. The red line is simply the average price over the past 50 days, while the blue line is the average price over the past 100 days.

Chartists usually plot two moving average lines to their chart, one for a shorter period of time (for example 50 days or 100 days) and other for a longer duration (ex 200 days). Whenever the daily price line cuts the moving average line, technical analysts try to interpret this penetration. The simple moving average is extremely popular among traders, but like all technical indicators, it does have its critics. Many individuals argue that the usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result. In response to this criticism, traders started to give more weight to recent data, which has since led to the invention of Exponential Moving averages (EMA). Learning the somewhat complicated equation for calculating an EMA may be unnecessary for many traders, since nearly all charting packages do the calculations for you.

The most common time periods used in moving averages are 15, 20, 30, 50, 100 and 200 days.

Interpretation of penetration of MA lines:

The empirical rules for buying are: 1. If the moving average line moves upward and the actual price line after cutting the moving average line from below rises above it, it is a signal of a bullish market and an indication to buy. 2. A buy signal is further confirmed when the short term moving average (say 100 DMA) crosses the long term moving average (say 200 DMA) from below. 3. If the moving average line moves downward and cuts the actual line, which lies below the moving average line, then it gives a bearish indication with a sell signal 4. A sell signal is further confirmed when the long term moving averages crosses the short terms moving average line from below.

6.2. Price-volume indicators (Momentum indicators)

Price and volume are very closely related. If price movement is supported by high volume it confirms the momentum in that direction Price rise with increase in volume indicates bullish trend in the stock Price rise with decreasing volume indicates lack of interest in buying at the higher price and is thus bearish indicator Price fall with increasing volume indicates bearish sentiment on the stock Price fall with decreasing volume indicates lesser number of sellers at lower level and is thus a bullish indicator

6.3.

New High & New low indicator

A rising market should normally view an expanding number of stocks hitting new high prices and decreasing new low prices Conversely, a declining market is usually accompanied by an increasing number of new lows and decreasing number of new highs. Technical analysts prefer to buy stocks with hit 52wk High and sell stocks which hit 52wk Low

6.4. Support and resistances

Any chart of a stock price or market index will show that the rise or fall is not uniform, and is rather characterized by a wave like pattern with successive peaks and troughs. When a stock price (or market index) touches a certain level and then drops, the peak is called resistance level. Conversely, when the Price after sliding to a trough bounces back, the bottom level of the trough is called support.

These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trendlines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance will likely be established.

Round Numbers and Support & Resistance One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions. Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as $50, which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major psychological points as well. The Importance of Support and Resistance Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level. Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance levels of an upward trending channel, the trend have accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel. Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support.

6.5. Chart patterns

A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. There are a number of chart patterns and empirical rules for predicting the future trend. Following are discussed some of the most common and trusted chart patterns followed by technical analysts all over the world.

Head & Shoulder pattern

This is the most important pattern that indicates the reversal of the price trend. There are two versions of this pattern, Head & Shoulders Top (shown on the left) and Head & Shoulder bottom (shown on the right) also known as inverted Head & Shoulder. There are four main parts to both of these head and shoulder patterns. Two shoulders, a head and a neck line. The fall below the neckline in case of Head & Shoulder top pattern (shown in the left figure) indicates the reversal of the uptrend. Similarly rise above the neckline of the inverted Head & Shoulder pattern (as shown in the right figure) indicates the reversal of the down trend.

Double top double bottom

This is another pattern which signals trend reversal. Double top as can be seen in the picture on the left is formed when a stock attempts to surpass a price level on the upside twice but could not and the price heads lower. Similarly double bottom is formed when a stock attempts to fall below a certain price level twice but could not and the price heads higher.

Channel formation (trend formation)

A channel is a uniformly changing tops and bottoms. During an upward sloping channel the stock price makes higher tops and higher bottoms as shown in the left figure, where as in downward sloping channel the stock price makes lower tops and lower bottoms. So if an upward sloping channel trend is confirmed one can take a position in the stock when the stock price takes a correction. On the other hand if a downward sloping channel is confirmed one can sell the stock on rise.

Relative Strength Index - RSI

A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula: RSI = 100 - 100/(1 + RS*) *Where RS = Average of x days' up closes / Average of x days' down closes.

As you can see from the chart, the RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. A trader using RSI should be aware that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. The RSI is best used as a valuable complement to other stock-picking tools.

EXAMPLES: Federal Bank

Investors with medium-term perspective can consider buying the stock of Federal Bank (Rs 445.3). The stock bottomed out in March 2009, taking support from its long-term base in the range between Rs 110 and Rs 120. Since then, it has been on a long-term uptrend forming higher peaks and troughs. Moreover, in February 2011, the stock's medium-term down trend came to an end as the stock took support in the band between Rs 330 and Rs 340. Subsequently, the stock changed direction, triggered by positive divergence in daily relative strength index and moving average convergence divergence indicator. The stock conclusively broke through its immediate key resistance as well as 200day moving average around Rs 390 by rallying more than 8 per cent, backed with good volumes in the last week of March. In the previous week, the stock advanced 5 per cent with good volumes reinforcing the bullish momentum. It has retraced more than 61.8 per cent fibonacci retracement level of its prior downtrend and the stock appears to have resumed its primary trend that is up. The stock is trading well above its 21 and 200-day moving averages. The 14-day relative strength index is featuring in the bullish zone and the weekly RSI has entered in to this zone from the neutral region. Daily MACD is inching higher in line with the stock and weekly MACD has signalled a buy. We are bullish on Federal Bank from a medium-term perspective. We believe that its ongoing up move has the potential of progressing further until it reaches our medium-term price target of Rs 520, with a minor pause around its previous of

Rs 501. Investors with medium-term perspective can consider buying the stock with stop-loss at Rs 405.

Hindustan Oil Exploration

We recommend a sell in the stock of Hindustan Oil Exploration from a shortterm perspective. It is evident from the charts of the stock that after finding support around Rs 160 between February and March, it started moving up wards. The stock accelerated higher in a short span of two weeks and encountered significant long-term resistance at Rs 230 on April 4. This resistance almost coincides with the 50 per cent fibonacci retracement level of the stock's prior down move from November 2010 peak of Rs 293. However, after testing this resistance for seven trading sessions, the stock's uptrend grow weaker and on Monday it tumbled five per cent. With this decline, the stock has breached its 200-day moving average. Moreover, this reversal has been triggered by negative divergence in the daily relative strength index. The daily RSI has entered in the neutral region from the bullish zone and weekly RSI is sloping in the neutral region. We are bearish on the stock from a short-term horizon. We anticipate it to decline further until it reaches our price target of Rs 210 or Rs 201 in the upcoming trading session. Traders with short-term perspective can consider selling the stock with stop-loss at Rs 221.

Technical Analysis Glossary

Accumulation: Process by which, over a period of time, a large or excess supply of stock or futures contracts is absorbed by increasing demand from buyers. Generally, there is little price action until the sellers have been exhausted. Then buyers dominate and price tends to rise. Advance/Decline Ratio: The number of stocks advancing divided by the number of stocks declining over a particular time period. See Breadth Ratio. Ascending Triangle (or Rising Triangle): A chart pattern containing a series of lows, each successively higher than the last, and a series of highs that are at approximately the same level. It is considered a bullish formation when volume increases on the ascending legs. When a breakout through the level of the highs is made, the pattern is completed. Apex: The point of intersection of two trendlines. A new trend may develop as prices approach the intersection. Bar Charts: Graphical displays of the trading in a security, bond, index, option or average characterized by vertical lines connecting the high and low prices for a specific period (day, week, month, year). The close of the period is marked with a short crossbar on the vertical line. Price or level is scaled arithmetically or semilogarithmically on the vertical axis. Time is marked on the horizontal axis at the bottom. Also at the bottom, the volume of trading for each period is indicated vertically as a histogram. Base: This chart pattern is formed after a decline by a considerable amount of trading occurring within a relatively narrow price range. The formation is completed when an upside breakout occurs. Bear Market: When the longer-term trend of security prices is down. When viewed within the four-year cycle, a bear market can often last a year or more. Bear Trap: A false move to the downside that does not start a new downtrend. It is the final reaction prior to an advance, hence "trapping the bears." Opposite of Bull Trap. Bellwether: A stock viewed as a leader in the market, e.g. "as GM goes, so goes the market." Also a bellwether or benchmark issue in the cash bond market, e.g. the most recently auctioned 10-year bond. Blow Off: A sharp price rise, accompanied by extraordinary volume; usually the culmination of an extended advance, leading to a sharp reaction. Bottom: The low point in a down move.

Bottom Reversal: The change in the direction of price movement/trend which occurs at stock market bottoms. Breadth: A measurement calculated by comparing the number of advancing stocks to the number declining. The more net advances seen in an up market, the greater its breadth; vice versa for down markets. Breadth Ratio: Computed by dividing the number of advances by the number of declines over a given time period, usually a day or a week. Breakaway Gap: Usually, a high-volume move out of a consolidation pattern. The strength of buying is sufficient to cause the security to jump to higher levels without trading at the intervening prices. A strong, sustained up move is normally indicated. Breakdown: A price drop below a significant support level or out of a consolidation pattern. Caused by sellers overwhelming buyers, it usually signals either the beginning or the resumption of a downtrend. Breakout: An upward move exceeding a previously recorded high, resistance level, or through a bullish trendline or some other criteria, often on high volume. Bull Trap: Occurs when in a bear market prices suddenly rise, luring in bulls taking long positions before resuming the downtrend. Candlestick Charts: A charting method developed in Japan in the 1700s. The high and low for the time period are described as shadow and plotted as a single line. The price range between the open and the close is plotted as a box or rectangle on the line. If the market closes above the open, the body of the box is white or empty. If the close is below the open, the body of the box or rectangle is black. Channels: The area between two parallel trendlines, the upper trendline connecting most of the important price peaks or closes and the lower trendline connecting the important lows or closes. Price reversals are expected to occur when prices approach either boundary. Charts: Graphical representations of price, volume and/or other data over a period of time. Commonly used in technical analysis are Bar Charts, Line Charts, Point and Figure Charts, Candlestick Charts and Market Profile. Climax or Selling Climax: The culmination or end of a protracted period of selling, characterized by high volume, forced margin selling, extreme degrees of negative market breadth (also in prior years a late ticker tape)--and panic. A climax marks the end of one of the late phases of a decline with an abrupt reversal. While the market may again retreat--sometimes even to new lows--the

climax is an obvious milepost to the beginning of the end of the bear market. Confirmation: Occurs when the action of one indicator corroborates the action of another. The implication is confidence that the trend will continue. The lack of such confirmation is often called divergence. Congestion Area: A price area where previous heavy volume trading has occurred. It is considered a likely area to find support or resistance in the future. Consolidation: A generally lateral period of trading in terms of price. It is usually an interruption of an ongoing uptrend or downtrend, as opposed to a reversal type of pattern. Continuation Pattern: A consolidation that temporarily interrupts a rally or decline and sets the stage for another move in the same direction. Correction: A price swing opposite in direction to that of the main trend. Major corrections can generally be one-third to two-thirds of the previous gain or decline. Count: A point and figure technique used to estimate a price objective or target-up or down. Calculations are based on the extent of prior sideways movements. Demand: Buying interest from investors. Theoretically, creates support. Descending Triangle: The converse or opposite of an Ascending Triangle. A continuation pattern with bearish implications. Volume is normally higher at the lows and decreases as the upper, downsloping trendline is approached. A break below the lower horizontal line of the pattern, on increased volume, completes the pattern and reaffirms the downtrend in progress. Distribution: The process by which demand is more than compensated for by expanding supply. Over a period of time, increasing supply has a negative effect on the price of a stock. Stocks under distribution are often signaled by broadening, rounding, or double or triple tops. Divergence: An action by one indicator moving, not in conjunction or agreement with another indicator, but rather counter to or short of it. Such non confirmations often signal reversals. Double Bottom: A reversal type chart pattern distinguished by two successive declines, both terminating at approximately the same level. When completed, accomplished by a rise on volume above the high between the two lows, the pattern often resembles the letter W. Double Top: A reversal type chart pattern--the obverse of the Double Bottom-which resembles the letter M.

Dow Theory: A description of market behavior, invented by Charles Dow, which divided price moves into three types of trends: major (lasting from months to years), intermediate (weeks to months) and minor (days to weeks). A primary corollary is that of mutual confirmation of moves by both the Industrial Average and the Transportation Average, i.e. a significant move by one average must be confirmed by a similar move in the other. This action provides the theory with the signals. Downside Volume: A daily, weekly or monthly summary of the volume transacted in all stocks which fell in the period. More loosely, down volume alludes to heavy volume during a period of generally declining prices. Elliott Wave Theory: A theory of market behavior published by Ralph Nelson Elliott in the 1930s. According to the theory, the stock market follows a pattern of five waves up and three waves down to form a complete cycle. Fibonacci Ratio: The relationship between two numbers in the fibonacci sequence. The sequence for the first three numbers is 0.618, 1.0, and 1.618. In general terms, the fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc. Formation: A recognized, technically significant chart pattern. While every chart pattern is unique, each general type tends to yield similar results. Head and Shoulders Top: A pattern characterized by a series of three peaks, the first and third being lower than the middle. Volume, heavy on the first peak, declines on the next two. Completion is marked by the breaking of the "neckline" (an extension of the line connecting the troughs between the three peaks) accompanied by heavy volume. An inverse head and shoulders is the same pattern upside down and volume increases through the pattern. Index: An average or other technical device, usually numerical, used to monitor or predict market moves. A broadly defined and used term, it is not necessarily an index in strict mathematical definition. Indicators: A subset of market measuring tools (indexes) used specifically for monitoring and forecasting, e.g. Confidence Index or Specialists' Short Sales Ratio. Indexes frequently use benchmarks or thresholds as signals of possible impending change in market outlook. Intermediate Term: Refers to a period of time often measured in terms of weeks or months. Line Formation: A sideways chart pattern that unfolds within a very narrow price range. The price swings are so limited, a line can often be drawn across the chart covering the prices, hence the name. The pattern indicates a tight balance

between supply and demand and thus the direction of the eventual breakout is made more meaningful as an indicator of the direction of the next move. Liquidity: A general term used to indicate how easily transactions can be executed at or near a given price in a given issue or market. It often relates to the number of dollars required to effect a given price change. A liquid stock can absorb more buying (selling) before a significant price change occurs than can an illiquid stock. Momentum: The strength or sustainability of a market move as measured by both volume and price. Moving average based indicators are often used, as are comparisons with the levels of previous time period. Most Active Stocks: A list of those stocks which have traded the most shares during the period, usually the day of the week. The list is a guide to those stocks or groups which are attracting the most attention. The average price of the list can be a guide to whether conversative or speculative issues are gaining in interest. Moving Average: A continuous smoothing technique computed by averaging a series of numbers (price, volume, etc.) progressively over a period of time. The series is often a week, a month or a quarter in length and is computed anew as each day or week goes by. It is often then plotted on a chart with the raw data for analysis purposes. Overbought: A market condition wherein a stock, group or market has recently extended or exceeded its normal range of movement on the upside. Often accompanied by increased volume and/or a string of unbroken up days. The condition implies a near term reversal is imminent. Oversold: The reverse of overbought. For the market as a whole, these conditions are often identified by a large number of net Declines (or Advances) for the period, high on balance volume and/or large momentum calculations. Extreme situations can continue for extended periods of time before the eventual reversal occurs. Pattern: A distinctive formation created on a chart by the up and down movement of prices. For example, head and shoulders, triangle, and double top. Pennant: A brief triangular consolidation within a steep advance having generally short-term implications. For inverse, see Flag. Pivot Point: The sum of the high, low and closing price divided by three. The following trading session, if the market falls below the pivot point, it could act as resistance. Accordingly, if the market rises above the pivot point it may act as support.

50% Principle (one-half retracement): After a sustained move in price, this principle holds that a normal correction can be expected to retrace one-half to two-thirds of the advance (or decline) before resuming the main trend. Point and Figure Chart: A method of charting in which only price changes (of a specific unit) and the direction of change are the variables. Time and volume dimensions are omitted. Price data are plotted on graph paper. New columns are begun when a reversal by at least one unite can be recorded. Pullback: A relatively rapid return, after a breakout, to the boundary area of the preceding pattern. It is usually characterized by light volume. Rally or Reaction: Price movement in the opposite direction to a stock's overall trend. Relative Strength: Price performance of a stock or group of stocks compared to a given norm, such as the Standard & Poor's 500 or the Dow Jones industrial average. A stock moving up 20% when the norm moves only 10% is considered to have good relative strength. Resistance: A supply of stock waiting to be sold at a price above the current level. Significant trading at that level has previously created a pattern which suggests there would be resistance to the price moving significantly above that level without a great deal of stock changing hands. Reversal: A shift in the direction of price movement caused by a change in demand and/or supply. Generally the longer the reversal pattern takes to develop, the more serious its implications. Sentiment Indicators: Indicators which attempt to gauge individual investor and/or professional attitudes toward the market. Monitoring the degree of optimism or pessimism present is a major tenet of technical analysis. Two examples are the amount of shorting being done and the number of advisory services which are bearish or bullish. Speculation Index: Historically, the ratio of the American Stock Exchange volume to that of the New York Stock Exchange. When the American Exchange volume is relatively high, it is thought to be a sign of increased speculation because of the large number of low-priced issues which trade there. Excessively high levels in this index have occurred near many market tops. Spike: A chart pattern revealing a sudden or extreme move to a new high or low. These formations are followed by an equally extreme move in the opposite direction. Support Level: An area or price level where a price decline may be expected to be halted (or to slow) by an increase in demand. Opposite of resistance.

Test: The movement of a stock or an average toward a previously established support or resistance level. It will respect the area reinforcing the support or resistance available there, or penetrate and initiate a new technical event such as a breakout. Three Percent Rule: This is often used as a guideline to determine if a breakout or breakdown is valid. The price should move at least 3% above or below the respective level for the move to be regarded as valid. Top or Tops: A period of distribution. The high point of an upward move or one of several recognized reversal patterns. Trend: A move in price either upward or downward, characterized by a series of higher lows and higher highs (uptrends) or lower highs and lower lows (downtrend). Trendline: A line which is drawn through successive maximum price movements, i.e., through a series of two or more successively lower peaks (downtrend) or successively higher troughs (uptrend). Trendlines can also be drawn through the close. The more instances of contact, the more the line is reinforced. Triangle: Narrowing of a trading range formed by a series of lower highs as well as higher lows. The pattern is completed by an often sharp high volume break through either of the converging trendlines. Triple Top: Similar to a double top, though much rarer, but with three peaks instead of two. Volume on each successive peak is usually less than on the previous peak. The pattern is completed when the price declines below the second reaction low. V Pattern: A price pattern resembling the letter V, characterized by a sharp downward move followed immediately by a rapid upward progression, which is often accompanied by heavier volume.