• PHLX/KBW Bank Index (BKX): A modified market capitalization–weighted index comprised of national money center banks and largeregional banks. Currently 24 companies are listed in this index.• PHLX Defense Sector (DFX): An equal-dollar-weighted index comprised of companies that are involved in the defense and aerospaceindustry. Currently 17 companies are listed in this index.• PHLX Drug Sector (RXS): An equal-dollar-weighted index comprised of companies that are involved in the pharmaceutical industry.Currently 14 companies are listed in this index.• PHLX Gold/Silver Sector (XAU): A market capitalization–weighted index comprised of companies that are involved in gold andsilver mining. Currently 13 companies are listed in this index.
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• PHLX Housing Sector (HGX): A modified market capitalization–weighted index comprised of companies involved in the housingsector, including builders and construction companies, materialproviders, and mortgage insurers. Currently 21 companies are listedin this index.• PHLX Oil Service Sector (OSX): A price-weighted index comprised of companies that are involved in oil drilling and production,field equipment, and related services. Currently 15 companies arelisted in this index.• PHLX Semiconductor Sector (SOX): A price-weighted index comprised of companies that are involved in the design, distribution, manufacturing, and sale of semiconductors. Currently 19 companies arelisted in this index.• PHLX Utility Sector (UTY): A market capitalization–weighted index comprised of public utilities located throughout the UnitedStates. Currently 20 companies are listed in this index.
TABLE A.1 Popular Indexes and SectorsSector
Industry
Index
Symbol
Transportation
AirlinesAirlines, Trucking, Rail
AMEX Airline IndexDJ Transportation Average
$XAL$TRAN
Health Care
BiotechPharmaceuticals
AMEX Biotech IndexAMEX Pharmaceutical Index
$BTK$DRG
Financials
BanksWall Street
PHLX Bank IndexAMEX Broker/Dealer Index
$BKX$XBD
Energy
Major OilOil DrillersNatural Gas
AMEX Oil IndexMS Oil Service IndexAMEX Natural Gas Index
$XOI$MGO$XNG
Utilities
UtilitiesUtilities
DJ Utility AveragePHLX Utility Average
$DUX$UTY
Technology
ComputersSoftwareInternetSemiconductors
GSTI Computer Hardware Index $GHAGSTI Computer Software Index $GSOPHLX Internet Index$DOTPHLX Semiconductor Index$SOX
Cyclicals
RetailersCyclicals
MS Retail IndexMS Cyclical Index
$MVR$CYC
Basic Materials
Precious MetalsSteel
PHLX Gold Mining IndexPHLX Steel Index
$XAU$STQ
MS Consumer Product Index
$CMR
Consumer Staples Consumer Products
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TABLE A.2 Popular Market AcronymsAAF—asset allocation fundAAGR—average annual growth rateAAR—average annual returnABS—automated bond systemA/D Line—advance/decline lineADR—American Depositary ReceiptADX—Average Directional MovementIndexAGI—adjusted gross incomeAMEX—American Stock ExchangeAMT—Alternative Minimum TaxAON—all or noneAPR—annual percentage rateAPV—adjusted present valueAPY—annual percentage yieldAR—accounts receivableARM—adjustable rate mortgageASX—Australian Stock ExchangeATM—at-the-moneyATP—arbitrage trading programATR—average true rangeBICs—bank investment contractsBIS—Bank for International SettlementsBOP—balance of paymentsBOT—balance of tradeBP—basis pointCAPEX—capital expenditureCAPM—capital asset pricing modelCAPS—convertible adjustable preferredstockCBOE—Chicago Board OptionsExchangeCBOT—Chicago Board of TradeCCE—cash and cash equivalentsCCI—Commodity Channel IndexCD—certiﬁcate of depositCEO—chief executive ofﬁcerCFA—chartered ﬁnancial analystCFO—chief ﬁnancial ofﬁcerCFP—certiﬁed ﬁnancial plannerCFPS—cash ﬂow per shareCFTC—Commodity Futures TradingCommissionCOGS—cost of goods sold
COO—chief operating ofﬁcerCPA—certiﬁed public accountantCPI—consumer price indexCPM—cost per thousandCSI—Commodity Selection IndexCUSIP—Committee on UniformSecurities Identiﬁcation ProceduresDAT—direct access tradingDD—due diligenceDI—disposable incomeDJIA—Dow Jones Industrial AverageDJTA—Dow Jones TransportationAverageDJUA—Dow Jones Utility AverageDMI—Directional Movement IndexDPSP—deferred proﬁt sharing planDRIP—dividend reinvestment planEAFE—European and Australasian, FarEast Equity IndexEBIT—earnings before interest andtaxesEBITDA—earnings before interest,taxes, depreciation, andamortizationECN—electronic communicationnetworkEDGAR—Electronic Data GatheringAnalysis and RetrievalEMA—exponential moving averageEPS—earnings per shareERISA—Employee Retirement IncomeSecurity ActESO—employee stock optionETF—exchange-traded fundFAD—funds available for distributionFASB—Financial Accounting StandardsBoardFDIC—Federal Deposit Insurance Corp.FFO—funds from operationsFIFO—ﬁrst in, ﬁrst outFHLMC—Federal Home Loan MortgageCorpFNMA—Federal National MortgageAssociation (Fannie Mae)(Continued)
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TABLE A.2 (Continued)FOMC—Federal Open MarketCommitteeFRA—forward-rate agreementFRB—Federal Reserve BoardFRS—Federal Reserve SystemsGAAP—generally accepted accountingprinciplesGARP—growth at a reasonable priceGDP—gross domestic productGIC—guaranteed investment certiﬁcateGNMA—Government National MortgageAssociation (Ginnie Mae)GO—general obligation bondGSE—government-sponsored enterpriseGTC—good till canceled orderHOLDRs—Holding Company DepositaryReceiptsHTML—hypertext markup languageIFCI—International Finance Corp.Investible IndexIPO—initial public offeringIRA—individual retirement accountIRR—internal rate of returnISO—International Organization forStandardizationITM—in-the-moneyIV—implied volatilityJSE—Johannesburg Stock ExchangeKCBT—Kansas City Board of TradeLBO—leveraged buyoutLEAPS—long-term equity anticipationsecuritiesLIFO—last in, ﬁrst outLLC—limited liability companyLP—limited partnershipMA—moving averageMACD—moving average convergencedivergenceMEM—maximum entropy methodMER—management expense ratioMIPS—Monthly Income PreferredSecuritiesMIT—market if touchedMPT—modern portfolio theory
MSCI—Morgan Stanley CapitalInternational IndexNASD—National Association ofSecurities DealersNASDAQ—National Association ofSecurities Dealers AutomatedQuotationsNAV—net asset valueNMS—normal market sizeNOI—net operating incomeNPV—net present valueNSO—nonqualiﬁed stock optionsNYSE—New York Stock ExchangeOBV—on-balance volumeOI—open interestOID—original issue discountOPEC—Organization of PetroleumExporting CountriesOTC—over-the-counterOTM—out-of-the-moneyPDF—portable document formatP/E—price-to-earnings ratioPEG—price/earnings to growthPOP—public offering oricePPI—producer price indexQQQQ—ticker symbol for NASDAQ 100Index TrustR&D—research and developmentREIT—real estate investment trustRIC—return on invested capitalROA—return on assetsROE—return on equityROI—return on investmentRPI—retail price indexRSI—relative strength indexSAI—Statement of AdditionalInformationSAR—stop and reverseSEC—Securities and ExchangeCommissionSEMI—Semiconductor Equipment &Materials InternationalSEP—simpliﬁed employee pensionSIC—Standard Industrial Classiﬁcation
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TABLE A.2 (Continued)SIPC—Securities Investor ProtectionCorp.SOES—small order execution systemSOX—Philadelphia SemiconductorIndexS&P—Standard and Poor’sSPDR—Standard & Poor’s DepositaryReceipts (ETF)SSR—sum of squared residualsSV—statistical volatilitySWIFT—Society for Worldwide InterbankFinancial TelecommunicationTPO—time price opportunity
TRIN—Traders IndexTSE—Toronto Stock ExchangeUN—United NationsVIX—CBOE Market Volatility IndexVXN—NASDAQ Volatility IndexVPT—volume price trendWSE—Winnipeg CommodityExchangeXD—ex-dividendXR—ex-rightsXY—ex-warrantsYTD—year-to-dateYTM—yield to maturity
TABLE A.3 Government ReportsComponent
Release Dates
Advancing Numbers
Declining Numbers
EmploymentReport
First Friday ofthe month.
A rise in theunemployment rateis often seen as anegative for stocksbut a positive forbonds.
A decrease inunemploymentnumbers is a positivesign for the economy.
WholesaleTrade
Second weekeach month.
Wholesale tradeinventories: If thisnumber rises,consumption isslowing. Inventoryto-sales ratio: Risingnumbers againreﬂect a slowdownin the economy.
Wholesale tradeinventories: Ifinventories are falling,consumption is on therise. Inventory-to-salesratio: If this numberbegins to fall, a consumerspending increasemeans more conﬁdence.(Continued)
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TABLE A.3 (Continued)Component
Release Dates
Advancing Numbers
Declining Numbers
Import andExportPrices
Aroundmidmonth.
Imports constitute15% of U.S.consumption; alsodirectly affect theproﬁtability of U.S.companies. Higherprices from importstranslate to higherprices of domesticgoods. Good news forbusiness, bad forconsumer.
If import prices fallU.S. companies mustlower prices tocompete. Bad forbusinesses, good forconsumers.
EmploymentCost Index(ECI)
Once a quartertoward end ofmonth forprecedingquarter.
Analyzes wages andfringe beneﬁts. Risingwages alone haveless meaning but areused in conjunctionwith other reports,like housing starts.
Lower wages mean aslowing economy, andwill be used inconjunction with othereconomic measurementsto gauge the economy’sstrength.
ConsumerPriceIndex (CPI)
Around 15th ofeach month.
Since the CPIdescribes pricechanges of a basketof consumer goods, arising number meansinﬂationary pressuresat work.
Bad for the marketbecause inﬂation is heldin check with risinginterest rates. A drop inprices is generallyconsidered a good signfor consumers and goodfor the market. Too muchof a drop is a negative.
ProducerPriceIndex (PPI)
Previousmonth’s dataare releasedduring thesecond fullweek of thecurrent month.
Increases may orDecreases mean themay not be goodeconomy is slowing. Bestnews: If interest rates to look at trends.are declining then aProlonged slowing mayrising PPI numberlead to deﬂation and ameans the economyrecession.is reacting to therate cuts. If rates areincreasing, this is badbecause further ratehikes may be required.
Institute ofSupplyManagementIndex (ISM)
First of month.
Above 50% indicateseconomic expansion.
Below 50% suggestseconomic contraction.
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TABLE A.3 (Continued)Component
Release Dates
Advancing Numbers
Declining Numbers
Retail Sales
Midmonth.
People are spendingmore and conﬁdenceis high—it’s a goodsign for the market.
People spend less andconﬁdence shrinks—it’sa bad sign for the market,especially retail stocks.
GrossDomesticProduct (GDP)
Released onemonth afterend of quarter.
Takes into accountconsumer demand,trade balance, etc.Economy expandingis good news, butnot too fast—the Fedraises rates whenthat happens.
Economy slowing. If itcontinues Fed will(possibly) lower rates;good for market.
HousingStarts/Sales of Newand ExistingHomes
Third weekof month.
Increasing startsindicate conﬁdence—a good sign forthe market.
Economy slowing. Redﬂag for Fed to be onlookout for downturn ineconomy. Market reactionis anybody’s guess.
ConstructionSpending
First of month.
Lagging indicator.Reports come in onlyafter building isﬁnished. An increasein numbers is agood sign.
Since it’s a laggingindicator, it may serve toconﬁrm the economy isslowing and rates needto be lowered. Good forthe market.
IndustrialProductionIndex
Midmonth.
This would indicatethe slack is beingtaken out of theeconomy; we’remaxing out.
Factories are slowingdown. Might beconsidered bad for themarket, is consideredbad for the economy.
PersonalIncome andConsumptionExpenditures
Third or fourthweek after themonth itreports on.
Doesn’t contributeProlonged decrease innew knowledge. Itconsumer demand isreports after otherdeﬁnitely bad forkey data (employment consumer stocks.and retail sales).
FactoryOrders:Durable GoodsandNondurableGoods
Four weeksfrom end ofreportingmonth.However,everyone keysoff of theadvance releaseone week prior.
Leading indicator ofindustrial demand.Numbers going up isgenerally a positivefor the markets.
Slowing demand meansa slowing economy if itstays in a declining modefor a few months. Mightadversely affect markets,but if it prompts interestrate reductions itcould be good.
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TABLE A.4 Fundamental Analysis ToolsMethod
Description
Usage
Price to Earnings(P/E)
The cost of a stock perdollar of proﬁt. Earningsover the previous12-month period arecommonly used (TTM:trailing 12 month).
This measure is used to monitora company’s period-over-periodperformance or for comparativepurposes. Evaluating periodover-period performance gives amore accurate picture thanlooking at one P/E measurement(snapshot).
Price to Earnings(estimated) (P/E)
The cost of a stock perdollar of estimated proﬁtfor the next 12 months.
Although it is difﬁcult to measurefuture earnings, use of estimatedearnings over the next 12months is more useful for futurevaluation considerations.
Price to CashFlow (P/CF)
The cost of a stock perdollar of cash ﬂow.
Since cash ﬂow is less impactedby accounting choices, thismeasure reﬂects a morestraightforward calculation. Theuse of capital leases can makeCF appear artiﬁcially high, thusrequiring adjustments to CF foran apples-to-apples comparison.
Price to Sales(P/S)
The cost of a stock perdollar of sales.
Corporate losses instead of proﬁtscan result in a P/E calculation thatis not meaningful. Sales ﬁgures,which are less subjective toaccounting method choice, can beused to monitor a company’sprogress or compare two or moreﬁrms. Growth companies andturnaround strategies may useP/S in place of P/E.
Price to BookValue (P/BV)
The cost of a stock perdollar of book value.
Book value is a valuation of acompany’s assets. Firms with lowP/BV are potential takeovertargets since the market isundervaluing the company.
Price to EarningsGrowth (PEG)
A forward measure of thecost of a stock per dollarof expected earningsgrowth.
Stocks with low PEGs aregenerally considered moreattractive than stocks with highPEGs (higher price relative toearnings growth).
Current Ratio
Amount of current assetscompared to currentliabilities.
Most commonly used solvencyratio. Available cash is alsoimportant.
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TABLE A.5 Sentiment Analysis ToolsIndicator
Type
Trend
Usage
ConﬁdenceIndex
Sentiment
Parallel
Index rises as investors shift fromhigh-grade to lower-grade bondswith bullish expectations.
Adviser Sentiment Sentiment
Contrary
Excessive adviser bearishness (60%)signals bottoms; optimism (10%bearish) signals tops.
Put-to-Call Ratio
Sentiment
Contrary
Excessive puts (70/100) or calls(40/100) signal bottoms or tops early.
Odd-Lot Trading
Sentiment
Parallel
Odd-lot investors step up theirbuying at bottoms and sell intomarket tops.
Specialist Trading
Sentiment
Parallel
Specialists buy and sell ahead of thetrend.
Money FundBalances
Cash Flow
Contrary
Rising balances draw money fromshares; declining balances are bullish.
Mutual FundLiquid AssetsRatio
Cash Flow
Contrary
Cash balances rise as the trend nearsa bottom when increased buyingpower exerts a bullish effect.
Customer CreditBalances
Cash Flow
Contrary
Cash balances rise or fall as themarket bottoms or peaks.
CustomerMargin Debt
Cash Flow
Parallel
Margin buyers are half as much indebt at tops as at bottoms.
Short Interest
Short Sale
Contrary
Increased short selling fuels ralliesand at extremes signals trendturning points.
Short InterestRatio
Short Sale
Contrary
Ratios of short interest to averagedaily trading volume above 1.75 arebullish; ratios under 1.0 are bearishfor the market.
Odd-Lot ShortSales
Short Sale
Contrary
Odd-lot short sellers are wildlyspeculative in the wrong direction.
Specialist ShortSale Ratio
Short Sale
Parallel
Ratios of specialist short sales topublic short sales above 3.5%are bearish; ratios below 1.8% arebullish.
Up/DownVolume
Breadth
Parallel
Daily volume change of 90% or moresignals trend reversal.(Continued)
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TABLE A.5 (Continued)Indicator
Type
Trend
Usage
OTC RelativeVolume
Breadth
Contrary
OTC volume breakouts above 80%provide bearish signals of excessivespeculation.
Advance/DeclineLine
Breadth
Parallel
The broad market peaks andbottoms ahead of the indexes;divergence signals turning points.
Traders Index(TRIN)
Breadth
Parallel
Measures average volume ofadvancers relative to decliners;readings above 1.5 are bullish.
Market P/E Ratio
Breadth
Contrary
Price/earnings ratios of 5 and 25 areapproximate lower and upper trendboundaries.
DJIA DividendYield
Breadth
Contrary
DJIA yield gets as low as 3% atmarket tops and as high as 18% atbottoms.
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TABLE A.6 Technical Analysis ToolsIndicator
Description
Usage
Volume
Number of shares or contractstraded during a certain timeperiod.
Volume should increase as thetrend progresses (up or down) toconﬁrm price.
Trend Line
A horizontal or sloping lineadded to a chart using pricepeaks or troughs.
Drawn from two price points, athird successful touch of price onthe line conﬁrms it.
Support
A price ﬂoor where buyersentering the market exceedsupply.
Long strategies (buyers) have alogical entry point when this pricearea holds or an exit when it fails.
Resistance
A price ceiling where sellersentering the market exceeddemand.
Long strategies (buyers) have alogical exit point when this pricearea holds or an entry when itfails.
Upward Trend A sloping support line forprice.
Trend traders are long and have alogical entry point when this pricearea holds or an exit when it fails.
DownwardTrend
A sloping resistance line forprice.
Trend traders are short (or puttraders) and have a logical entrypoint when this price area holdsor an exit when it fails.
MovingAverage(MA)
A lagging line constructed bycalculating the average pricefor a security using a setnumber of periods.
Used alone or in combinationwith other MA lines to gainunbiased insights about trendsand/or to generate buy and sellsignals.
BollingerBands
Contracting and expandingbands around price based uponMAs and standard deviation.
Contracting bands indicate pricevolatility is decreasing, andexpanding bands indicate it isincreasing.
Oscillators
Wave-like lines displayed in agraph below price that providedifferent price and/or volumeinformation.
Oscillators can be used to provideinsight on overbought or oversoldconditions and/or to provide priceprice conﬁrmation or divergence.
MACD
An oscillator and histogramMACD is used to display pricedisplay that combines movingconﬁrmation or divergence andaverage data and rate of change. has both leading and laggingproperties.
Elliott Wave
Price patterns that reﬂect crowdbehavior in the markets. A ﬁvewave pattern reﬂects an impulsemove and a three-wave patternreﬂects a corrective move.
Traders use the latter portion ofthe wave pattern to establishpositions (higher probabilitytrades). These include moves fromthe end of wave 4 to wave 5 andfrom wave 5 to the next pattern.
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TABLE A.7 Charting PatternsPattern
Description
Usage
DoubleTop
Reversal: Forms at price tops.Time: Longer term.Volume rises into second peakProjection: Peak towhich is roughly the same height dotted baseline.as the ﬁrst.
DoubleBottom
Reversal: Forms at price bottoms. Time: Longer term.Volume declines into secondProjection: Troughtrough which is roughly theto dotted baseline.same depth as the ﬁrst.
TripleTop
Reversal: Forms at price tops.Volume rises into third peakwhich is roughly the sameheight as the ﬁrst.
TripleBottom
Reversal: Forms at price bottoms. Time: Longer term.Volume declines into the thirdProjection: Troughtrough which is roughly theto dotted baseline.same depth as ﬁrst.
Head andShoulders
Reversal: Specialized triple top—the middle peak is higher thanpeaks 1 and 3. Volumeincreases out of pattern.
Time: Varies.Projection: Peakto dottedneckline.
InvertedHeadandShoulders
Reversal: Specialized triplebottom—the middle trough isdeeper than troughs 1 and 3.Volume increases out ofpattern.
Time: Varies.Projection: Troughto dottedneckline.
Rectangle
Consolidation: Range-bound price Time: Longer term.that moves between support and Projection: Widthresistance. False breakouts often of pattern.return to pattern.
Trend/Proﬁle
Time: Longer term.Projection: Peak todotted baseline.
Symmetrical Continuation (usually):TriangleDownward sloping resistanceand upward sloping supportform triangle that consolidatesprice. Volume decreases intothe apex.
Time: Constrainedby apex.Projection: Widthof triangle atopening.
Flag
Time: Shorter term.Projection: Same asmove into ﬂag.
Continuation: A rectangularpause that occurs midway in astrong move (up or down). Thestrong move resembles aﬂagpole.
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TABLE A.7 (Continued)Pattern
Description
Usage
Pennant
Continuation: A triangular pausethat occurs midway in a strongmove (up or down). The strongmove resembles a ﬂagpole.
Time: Shorter term.Projection: Same asmove intopennant.
Ascending Upward bias: Horizontal resistance Time: ConstrainedTriangleand upward sloping supportby apex.form triangle with pricebreaking to the upside.Descending Downward bias: DownwardTrianglesloping resistance and horizontalsupport form triangle withprice breaking downward.
Time: Constrainedby apex.
Trend/Proﬁle
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Focus onTechnicalAnalysis
T
here are three core concepts to understand about technical indicators and technical analysis in general, which are the basis by whichall technical analysis is carried out:
1. Market action represents all information.2. Price moves in trends.3. Everything repeats but not exactly in the same manner.
Information such as earnings forecasts, market conditions, OPECmeetings, mergers, and announcements by the Federal Reserve impact various markets. Prices may move up or down as a result of the interpretationof these and other factors. To the technical analyst, the market absorbsthat information, which is then reflected in current prices. By the time aninvestor hears the news of a major bit of information, the market has already acted on it. If an investor or trader attempts to figure out the impactof every ounce of information, that individual would play a catch-up gameforever and probably lose. The technical analyst is not concerned with thereasons for a price change. The technician accepts the change and is moreinterested in the direction of the price change than in the rationale behindit. The technician leaves the rationale to the fundamental analyst. In addition, prices move up, down, or sideways. The important thing to be awareof is that they move in a direction until something changes the direction.Prices do not change by themselves, and the current trend will remain ineffect until more economic news or other influences appear.373
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It is this momentum of trends that allows for technical forecasting,which is a key strength of charting. Also, when using technical indicators,patterns start to emerge and these patterns are predictable. In many ways,charting and the study of human psychology go hand in hand. Price patterns repeat because human behavior repeats. In today’s high-tech worldthe technician has the capability to apply and view an abundance of technical indicators with the click of a button. It is important for the trader tounderstand what the indicator is saying because it provides the traderwith a better sense of what is moving prices and, more importantly, inwhat direction.
ON-BALANCE VOLUMEThe on-balance volume, commonly referred to as the OBV indicator, wasfirst introduced in 1963 by Joseph Granville and was one of the earliestand most popular indicators to gauge positive and negative volume flow.This indicator basically relates volume to price change. The OBV uses thechange in the closing price from one period to the next to value the volume as positive or negative volume flow. It does this by maintaining a cumulative total volume figure, which is adjusted by either adding thecurrent period’s volume to the cumulative amount if the period closeshigher than previously, or by subtracting the current volume from the cumulative amount if the period closes lower. Therefore, when a stock is rising, the day’s volume is added; when it is declining, the day’s volume issubtracted. The same can be done for weekly and monthly periods, butdaily is the most common.The OBV is typically calculated and viewed graphically using a technical analysis and charting package. It is plotted and presented as a line below the price chart. An example is provided in the chart of LehmanBrothers (LEH) in Figure B.1. Since the technician wants to see rising volume when the stock price is increasing, a rising OBV line is a bullish sign(i.e., there is more volume on the up days than down days, and on-balancevolume is confirming the trend). Conversely, when OBV is downwardsloping, it suggests more volume on days when the stock is falling, andthat is interpreted as a negative sign. The sellers are dominating tradingand there is more volume during the declines.In addition to analyzing the trend of OBV, the indicator generates trading signals in two other ways. First, when OBV develops a clear trend ordirection and then suddenly changes direction, as occurs in this graph inlate September and early October, it hints at a trend reversal. In otherwords, the momentum has shifted and the stock price is likely to follow
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FIGURE B.1 OHLC of Lehman Brothers Using the On Balance Volume Indicator(Source: www.ProﬁtSource.com)
OBV in reversing direction. Second, if a stock rises to new highs,