SCENDING TRENDLINE — The declining wave in a stock or commodityis composed of a series of ripples. When the tops of these ripples form on,or very close to, a downward slanting straight line, a basic Descending orDown Trendline is formed.DESCENDING TRIANGLE — One of a class of Area Patterns calledRight-Angle Triangles. The class is distinguished by the fact that one of thetwo boundary lines is practically horizontal, while the other slants towardit. If the bottom line is horizontal and the upper slants downward to anintersection point to the right, the resulting Area Pattern is called a Descending Triangle. The implication is Bearish, with the expectant breakout throughthe flat (horizontal) side. Minimum Measuring Formula: add the broadestpart of the Triangle to the breakout point.DIAMOND — Usually a Reversal Pattern, but it will also be found as aContinuation Pattern. It could be described as a Complex Head-and-Shoulders Pattern with a V-shaped (bent) Neckline, or a Broadening Pattern which,after two or three swings, changes into a regular Triangle. The overall shapeis a four-point Diamond. Since it requires a fairly active market, it is moreoften found at Major Tops. Many Complex Head-and-Shoulders Tops areborderline Diamond Patterns. The major difference is in the right side of thepattern. It should clearly show two converging lines with diminishing volume as in a Symmetrical Triangle. Minimum Measuring Formula: add thegreatest width of the pattern to the breakout point.DISTRIBUTION — The first phase of a Bear Market, which really begins inthe last stage of a Bull Market. The period when farsighted investors sensethat the market has outrun its fundamentals and begin to unload theirholdings at an increasing pace. Trading volume is still high; however, it tendsto diminish on rallies. The public is still active, but beginning to show signsof caution as hoped-for profits fade away.DIVERGENCE — When new highs (or lows) in one indicator are not realizedin another comparable indicator. (See also Confirmation.)DIVERGENT PATTERN (TREND) — Those patterns with upper and lowerboundary lines which meet at some point if extended to the left. (See alsoBroadening Formation.)
AU3772_book.fm Page 751 Saturday, November 18, 2006 5:29 PM
Glossary
751
DIVERSIFICATION — The concept of placing your funds in different industry groups and investment vehicles to spread risk. Not to put all yourfinancial eggs in one basket.DIVIDENDS — A share of the profits, in cash or stock equivalent, which ispaid to stockholders.DORMANT BOTTOM — A variation of a Rounding (Bowl) Bottom, but inan extended, flat-bottomed form. It usually appears in “thin” stocks, (i.e.,those issues with a small number of shares outstanding) and characteristically will show lengthy periods during which no sales will be registered fordays at a time. The chart will appear “fly-specked” due to the missing days.The technical implication is for an upside breakout.DOUBLE BOTTOM — Reversal Pattern. A Bottom formed on relatively highvolume which is followed by a rally (of at least 15%), and then a secondBottom (possibly rounded) at the same level (plus or minus 3%) as the firstBottom on lower volume. A rally back though the apex of the interveningrally confirms the Reversal. More than a month should separate the twoBottoms. Minimum Measuring Formula: take the distance from the lowestbottom to the apex of the intervening rally and add it to the apex.DOUBLE TOP — A high-volume Top is formed, followed by a reaction (ofat least 15%) on diminishing activity. Another rally back to the previous high(plus or minus 3%) is made, but on lower volume than the first high. Adecline through the low of the reaction confirms the Reversal. The two highsshould be more than a month apart. Minimum Measuring Formula: add tothe breakout point the distance from the highest peak to the low of thereaction. Also called an “M” Formation.DOUBLE TRENDLINE — When two relatively close Parallel Trendlines areneeded to define the true trend pattern. (See also Trendline.)DOW–JONES INDUSTRIAL AVERAGE — Developed by Charles Dow in1885 to study market trends. Originally composed of 14 companies (12railroads and 2 industrials), the rails, by 1897, were separated into their ownAverage, and 12 industrial companies of the day were selected for the Industrial Average. The number was increased to 20 in 1916, and to 30 in 1928.The stocks included in this Average have been changed from time to timeto keep the list up to date, or to accommodate a merger. The only originalissue still in the Average is General Electric.DOW–JONES TRANSPORTATION AVERAGE — Established at the turn ofthe century with the new Industrial Average, it was originally called the RailAverage and was composed of 20 railroad companies. With the advent ofthe airlines industry, the Average was updated in 1970 and the name changedto Transportation Average.
AU3772_book.fm Page 752 Saturday, November 18, 2006 5:29 PM
752
Technical Analysis of Stock Trends
DOW–JONES UTILITY AVERAGE — In 1929, utility companies weredropped from the Industrial Average and a new Utility Average of 20 companies was created. In 1938, the number of issues was reduced to the present 15.DOWNTICK — A securities transaction which is at a price that is lower thanthe preceding transaction.DOWNTREND — See Descending Trendline and Trend.DRAWDOWN or RETRACEMENT — The ebb, or loss, of a portfolio’s equityfrom a relative high to a relative low. Maximum drawdown equals retracement from maximum high point to minimum low point.END RUN — When a breakout of a Symmetrical Triangle Pattern reversesits direction and trades back through axis Support (if an upside breakout)or Resistance (if a downside breakout), it is termed an end run around theline, or end run for short. The term is sometimes used to denote breakoutfailure in general.EQUILIBRIUM MARKET — A price area that represents a balance betweendemand and supply.EX-DIVIDEND — The day when the dividend is subtracted from the priceof the stock.EX-DIVIDEND GAP — The gap in price caused when the price of a stockis adjusted downward after the dividend payment is deducted.EXERCISE — The means by which the holder of an option purchases or sellsshares of the underlying security.EXHAUSTION GAP — Relatively wide gap in the price of a stock or commodity which occurs near the end of a strong directional move in the price.These gaps are quickly closed, most often within 2 to 5 days, which helpsto distinguish them from Runaway Gaps, which are not usually covered fora considerable length of time. An Exhaustion Gap cannot be read as a MajorReversal, or even necessarily a Reversal. It signals a halt in the prevailingtrend, which is ordinarily followed by some sort of area pattern development.EXPIRATION — The last day on which an option can be exercised.EXPONENTIAL SMOOTHING — A mathematical method of forecastingwhich assumes future price action may be forecast by using a weightedaverage of past periods; a mathematical series in which greater weight isgiven to more recent price action. A method of trend identification.FALLING WEDGE — An Area Pattern with two downward slanting, converging trendlines. Normally, it takes more than 3 weeks to complete, andvolume will diminish as prices move toward the apex of the pattern. Theanticipated direction of the breakout in a Falling Wedge is up. MinimumMeasuring Formula: a retracement of all the ground lost within the Wedge.(See also Wedge.)
AU3772_book.fm Page 753 Saturday, November 18, 2006 5:29 PM
Glossary
753
FALSE BREAKOUT or FALSE SIGNAL— A breakout which is confirmedbut which quickly reverses and eventually leads the stock or commodity toa breakout in the opposite direction. Indistinguishable from premature breakout or genuine breakout when it occurs.FAN LINES — A set of three secondary trendlines drawn from the samestarting high or low, which spread out in a Fan shape. In a Primary Uptrend,the fan would be along the tops of the Secondary (Intermediate) Reaction.In a Primary Downtrend, the fan would be along the bottoms of the Secondary (Intermediate) Rally. When the third Fan Line is broken, it signals theresumption of the Primary Trend.50-DAY MOVING AVERAGE LINE — Is determined by taking the closingprice over the past 50 trading days and dividing by 50. EN: Simple movingaverage for n days consists of summing prices for n days and dividing by n. Onn+1 drop the first day and add the new day to the formula, etc.FIVE-POINT REVERSAL — See Broadening Pattern.FLAG — A Continuation Pattern. A flag is a period of congestion, less than4 weeks in duration, which forms after a sharp, near vertical, change in price.The upper and lower boundary lines of the pattern are parallel, though bothmay slant up, down, or sideways. In an uptrend, the pattern resembles aFlag flying from a mast, hence the name. Flags are also called Measuring orHalfMast Patterns because they tend to form at the midpoint of the rally orreaction. Volume tends to diminish during the formation, and increase onthe breakout. Minimum Measuring Formula: add the distance from thebreakout point, which started the preceding “Mast” rally or reaction, to thebreakout point of the Flag.FLOATING SUPPLY — The number of shares available for trading at anygiven time. Generally, the outstanding number of shares less shares closelyheld and likely to be unavailable to the public. Shares of a company held byits employee pension fund, for example, would not generally enter thetrading stream and could be subtracted from the outstanding shares.FORMATION — See Area Pattern.FRONT-MONTH — The first expiration month in a series of months.FUNDAMENTALS — Information on a stock pertaining to the business ofthe company and how it relates to earnings and dividends. In a commodity,it would be information on any factor which would affect supply or demand.EN: Also, earnings, profits, profit margins, cash flow, sales, and other statisticssometimes used to obfuscate the value of the issue.GAP — A hole in the price range which occurs when either (1) the lowestprice at which a stock or commodity is traded during any time period ishigher than the highest price at which it was traded on the preceding timeperiod, or (2) the highest price of one time period is lower than the lowest
AU3772_book.fm Page 754 Saturday, November 18, 2006 5:29 PM
754
Technical Analysis of Stock Trends
price of the preceding time period. When the ranges of the two time periodsare plotted, they will not overlap or touch the same horizontal level on thechart — there will be a price gap between them. (See also Common or AreaGap, Ex-Dividend Gap, Breakaway Gap, Runaway Gap, Exhaustion Gap,and Island Reversal.)GRAPH — See Chart.HALF-MAST: — See Flag. Edwards said “The flag flies at half-mast” referring to the tendency of prices to consolidate half way through a surgingvertical run.HEAD-AND-SHOULDERS PATTERN — Although occasionally an InvertedHead-and-Shoulders Pattern (called a Consolidation Head-and-Shoulders)will form, which is a Continuation Pattern, in its normal form, this patternis one of the more common and more reliable of the Major Reversal Patterns.It consists of the following four elements (a Head-and-Shoulders Top willbe described for illustration): (1) a rally which ends a more or less extensiveadvance on heavy volume, and which is then followed by a Minor Reactionon less volume; this is the left shoulder; (2) another high-volume advancewhich exceeds the high of the left shoulder, followed by another low-volumereaction which takes prices down to near the bottom of the preceding reaction, and below the top of the left shoulder high; this is the head; (3) a thirdrally, but on decidedly less volume than accompanied either of the first twoadvances, and which fails to exceed the high established on the head; thisis the right shoulder; and (4) a decline through a line drawn across theproceeding two reaction lows (the neckline), and a close below that lineequivalent to 3% of the stock’s market price. This is the confirmation of thebreakout. A Head-and-Shoulders Bottom, or any other combinationHeadand-Shoulders Pattern, contains the same four elements. The maindifference between a Top Formation and a Bottom Formation is in the volumepatterns. The breakout in a Top can be on low volume. The breakout in aBottom must show a “conspicuous burst of activity.” Minimum MeasuringFormula: add the distance between the head and neckline to the breakoutpoint.HEAD-AND-SHOULDERS BOTTOM — Area Pattern which reverses adecline. (See also Head-and-Shoulders Pattern.) EN: An upside down name foran upside down pattern. See Kilroy Bottom.HEAD-AND-SHOULDERS CONSOLIDATION — Area Pattern which continues the previous trend. (See also Head-and-Shoulders Pattern.)HEAD-AND-SHOULDERS TOP — Area Pattern which reverses an advance.(See also Head-and-Shoulders Pattern.)HEAVY VOLUME — The expression “heavy volume,” as used by Edwardsand Magee, means heavy only with respect to the recent volume of sales inthe stock you are watching.
AU3772_book.fm Page 755 Saturday, November 18, 2006 5:29 PM
Glossary
755
HEDGING — To try to lessen risk by making a counterbalancing investment.In a stock portfolio, an example of a hedge would be to buy 100 shares ofXYZ stock, and to buy one put option of the same stock. The put would helpprotect against a decline in the stock, but it would also limit potential gainson the upside. See Natural Hedge.HISTORICAL DATA — A series of past daily, weekly, or monthly market prices.HOOK DAY — A trading day in which the open is above/below prior day’shigh/low and the close is below/above prior day’s close with narrow range.HORIZONTAL CHANNEL — When the Tops of the rallies and Bottoms ofthe reactions form along lines which are horizontal and parallel to oneanother, the area in between is called a Horizontal Trend Channel. It mayalso be called a Rectangle during the early stages of formation.HORIZONTAL TRENDLINE — A horizontal line drawn across either theTops or Bottoms in a sideways trending market.HYBRID HEAD-AND-SHOULDERS — A small Head-and-Shoulders Pattern within a larger Head-and-Shoulders Pattern. (See also Head-and-Shoulders Pattern.)INDUSTRIAL AVERAGE — See Dow–Jones Industrial Average.INSIDE DAY — A day in which the daily price range is totally within theprior day’s daily price range.INSIDERS — Individuals who possess fundamental information likely toaffect the price of a stock, but which is unavailable to the public. An examplewould be an individual who knows about a merger before it is announcedto the public. Trading by insiders on this type of information is illegal.IPO — Initial Public Offering.INTERMEDIATE TREND — In Edwards and Magee, the term Intermediateor Secondary refers to a trend (or pattern indicating a trend) against thePrimary (Major) Trend which is likely to last from 3 weeks to 3 months, andwhich may retrace one third to two thirds of the previous Primary Advanceor Decline.INVERTED BOWL — See Rounding Top.INVERTED TRIANGLE — See Right-Angled Broadening Triangle.ISLAND REVERSAL — A compact trading range, usually formed after afast rally or reaction, which is separated from the previous move by anExhaustion Gap, and from the move in the opposite direction which followsby a Breakaway Gap. The result is an Island of prices detached by a gapbefore and after. If the trading range contains only one day, it is called aOne-Day Island Reversal. The two gaps usually occur at approximately thesame level. By itself, the pattern is not of major significance; but it does
AU3772_book.fm Page 756 Saturday, November 18, 2006 5:29 PM
756
Technical Analysis of Stock Trends
frequently send prices back for a complete retracement of the Minor Movewhich preceded it.KILROY BOTTOM — The Editor’s contribution to the nomenclature. A moredescriptive term for the undescriptive “Head-and-Shoulders Bottom”.LADDERING — A practice some Wall Street underwriters used in the tulipomania of the 1990s. Consists of selling IPO shares for the pre-openingprice to insider customers in exchange for their agreement to buy more inthe public offering at higher prices. Caused extreme volatility and big runups in early days of IPOs. An unethical form of price manipulation.LEVERAGE — Using a smaller amount of capital to control an investmentof greater value. For example, exclusive of interest and commission costs, ifyou buy a stock on 50% margin, you control $1 of stock for every 50 centsinvested or leverage of 2-to-1.LIMIT MOVE — A change in price which exceeds the limits set by theexchange on which the futures contract is traded.LIMIT ORDER — A buy or sell order which is limited in some way, usuallyin price. For example, if you placed a limit order to buy IBM at 100, thebroker would not fill the order unless he could do so at your price or better,i.e., at 100 or lower.LIMIT UP, LIMIT DOWN — Commodity exchange restrictions on the maximum upward or downward movements permitted in the price for a commodity during any trading session day.LINE, DOW THEORY — A Line in the Dow Theory is an IntermediateSideways Movement in one or both of the Averages (Industrial and/orTransportation)in the course of which prices fluctuate within a range of 5%(of mean price) or less.LOGARITHMIC SCALE — See Semilogarithmic Scale.MAJOR TREND — In Edwards and Magee, the term Major (or Primary)refers to a trend (or pattern leading to such a trend) which lasts at least oneyear, and shows a rise or decline of at least 20%.MARGIN — The minimum amount of capital required to buy or sell a stock.The rate, 50% of value in 2005, is set by the government. In a commodity,margin is also the minimum, usually about 10%, needed to buy or sell acontract. But the rate is set by the individual exchanges. The two differ incost as well. In a stock, the broker lends the investor the balance of the moneydue and charges interest for the loan. In a commodity, margin is treated asa good faith payment. The broker does not lend the difference, so no interestexpense is incurred.MARKET ON CLOSE — An order specification which requires the brokerto get the best price available on the close of trading.
AU3772_book.fm Page 757 Saturday, November 18, 2006 5:29 PM
Glossary
757
MARKET ORDER — An instruction to buy or sell at the price prevailingwhen the order reaches the floor of the exchange.MARKET RECIPROCAL — Normal average range of a stock based on theaverage range for a number of years, divided by the current average range.The result is the reciprocal of the market movement for the period. Widemarket activity, for example, would show a small decimal, less than 1. Dulltrading would be a larger number.MAST — The vertical rally or reaction preceding a Flag or Pennant Formation.McCLELLAN OSCILLATOR — An Index based on New York StockExchange net advances over declines. It provides a measure of such conditions as overbought/oversold and market direction on a short- to intermediate-term basis. The McClellan Oscillator measures a Bear Market SellingClimax when registering a very negative reading like –150. A sharp buyingpulse in the market is indicated by a very positive reading, well above 100.MEASURING FORMULAE — There are certain patterns which do allow thechartist the opportunity to project at least an interim target level of thedirection of the Primary Trend. The most important of these patterns arefound to be Triangles, Rectangles, Head-and-Shoulders, Pennants and Flags.Triangles — When a stock breaks out of a Symmetrical Triangle (eitherup or down), the ensuing move should carry at least as far as theheight of the Triangle as measured along its first reaction.Rectangles — The minimum you would expect from a breakout (up ordown) out of a Rectangle Pattern would be the distance equal to theheight of the formation.Head-and-Shoulders Tops/Bottoms — The Head-and-Shoulders Patternhas one of the better measuring sticks. In either a Top or Bottom, theinterim target, once the neckline is penetrated, is the distance fromthe Top (or Bottom) of the head to the level of the neckline directlybelow (above) the head.Pennants and Flags — The one thing to remember about these Continuation Patterns is that they “fly at half-mast.” In other words, the legin equals the leg out.MEASURING GAP — See Runaway Gap.MEGAPHONES — Megaphones are Broadening Tops. The Broadening Formation may evolve in any one of the three forms comparable, respectively,to Inverted Symmetrical, Inverted Ascending, or Descending Triangles. Thesymmetrical type, for example, consists of a series of price fluctuations acrossa horizontal axis, with each Minor Top higher and each Minor Bottom lowerthan its predecessor. The pattern may thus be roughly marked off by twodiverging lines, the upper sloping up from left to right, the lower slopingdown. These Broadening Patterns are characteristically loose and irregular,
AU3772_book.fm Page 758 Saturday, November 18, 2006 5:29 PM
758
Technical Analysis of Stock Trends
whereas Symmetrical Triangles are regular and compact. The convergingboundary lines of Symmetrical Triangles are clearly defined, as a rule. Topsand Bottoms within the formation tend to fall within fair precision on theseboundary lines. In the Broadening Formation, the rallies and declines usuallydo not all stop at clearly marked boundary lines and are subject to spikes.We could call this a Megaphone Spike because the formation keeps oncrowding at the lines to look like a megaphone. It has a tendency to spikedown more than up.MINOR TREND — In Edwards and Magee, the term Minor refers to brieffluctuations (usually less than 6 days and rarely longer than 3 weeks) which,in total, make up the Intermediate Trend.MOMENTUM INDICATOR — A market indicator which utilizes volumestatistics for predicting the strength or weakness of a current market andany overbought or oversold conditions, and to distinguish turning pointswithin the market.MOVING AVERAGE — A mathematical technique to smooth data. It iscalled moving because the number of elements are fixed, but the time intervaladvances. Old data must be removed when new data is added, which causesthe average to “move along” with the progression of the stock or commodity.EN: Simple moving average for n days consists of summing prices for n days anddividing by n. On n+1, drop the first day and add the new day to the formula, etc.MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD) — MACD,an oscillator derived by dividing one Moving Average by another. Basically,it combines three Moving Averages into two lines. In today’s computerprograms, the Moving Averages are usually exponentially weighted, thusgiving more weight to the more recent data. It is plotted in a chart with ahorizontal Equilibrium Line.The Equilibrium Line is important. When the two Moving Averages crossbelow the Equilibrium Line, it means that the shorter EMA is at a value lessthan the longer EMA. This is a Bearish signal. When the EMAs are abovethe Equilibrium Line, it means that the shorter EMA has a value greater thanthe longer EMA. This is a Bullish signal.The first line is the difference between a 12-period Exponential MovingAverage and a 26-period Exponential Moving Average. The second line(signal line) is an approximate exponential equivalent of a 9-period MovingAverage of the first line. The exponential values being 0.15, 0.075, and 0.20.An MACD can be displayed as a line oscillator or a histogram.Buy signals are generated when the faster Moving Average Line crossesthe slower Moving Average Line from below. Sell signals come from theopposite, when the faster line crosses the slower line from above. Beware ofmechanically trading every MACD crossover; it can lead to whipsaws anddrawdowns with substance. The fact is, narrow trading ranges give manyfalse signals which can be avoided with additional interpretation. (See alsoAppendix C.)
AU3772_book.fm Page 759 Saturday, November 18, 2006 5:29 PM
Glossary
759
MOVING AVERAGE CROSSOVERS — The point where the various MovingAverage Lines pass through or over each other.MULTICOLINCARITY — The incorrect procedure of using the identical datato supply different types of indicators. The indicators will all confirm eachother since they are based on the same data. Combining RSI, Moving AverageConvergence/Divergence (MACD), and rate of change (where all indicatorsuse the same closing prices and relative time periods) should provide thesame signals, but they could easily be incorrect. Multicolincarity can beavoided by using one indicator based on closing prices, another from volume, and a third from price ranges. It can also be avoided by using datagenerated indicators compared to chart patterns. (See also Bollinger Bands,MACD, Wilder RSI.)MULTIPLE HEAD-AND-SHOULDERS PATTERN — See Complex Headand-Shoulders.NARROW RANGE DAY — A trading day with a narrower price rangerelative to the previous day’s price range.NATURAL and UNNATURAL Methods or Systems — Bassetti’s half humorous identification of “natural methods” of analysis, such as chart analysis,which looks directly at market data, as opposed to “unnatural methods”which place an algorithm between the data and the analysis, such as movingaverages, oscillators, etc.NATURAL HEDGE — Bassetti’s formulation of a technique recommendedby Magee whereby a portfolio is always somewhat long and somewhat short.It is an imperfect hedge intended to cushion downside (or upside) risks. E.g.,long the DIA and short its members (or their proxies) which are in downtrends.NECKLINE — In a Head-and-Shoulders Pattern, it is the line drawn acrossthe two reaction lows (in a Top), or two rally highs (in a Bottom), whichoccur before and after the head. This line must be broken by 3% to confirmthe Reversal. In a Diamond Pattern, which is similar to a Head-and-Shoulders Pattern, the neckline is bent in the shape of a V or inverted V. (See alsoDiamond and Head-and-Shoulders.)NEGATIVE DIVERGENCE — When two or more Averages, indexes, orindicators fail to show confirming trends.NORMAL RANGE FOR PRICE — EN: An analytical tool invented by Mageefor measuring the volatility of stocks. Cumbersome in the modern context, butinteresting. Cf. Appendix A.ODD LOT — A block of stock consisting of less than 100 shares.ON BALANCE VOLUME (OBV) — OBV is a popular Volume Indicator,developed by Joseph Granville. Constructing an OBV line is very simple:the total volume for each day is assigned a positive or negative value depending on whether prices closed higher or lower that day. A higher close results
AU3772_book.fm Page 760 Saturday, November 18, 2006 5:29 PM
760
Technical Analysis of Stock Trends
in the volume for that day getting a positive value, while a lower close resultsin a negative value. A running total is kept by adding or subtracting eachday’s volume based on the direction of the close. The direction of the OBVline is watched, not the actual volume numbers.Formula:• If Today’s Close > Yesterday’s Close,then OBV = Yesterday’s OBV + Today’s Volume• If Today’s Close < Yesterday’s Close,then OBV = Yesterday’s OBV – Today’s Volume• If Today’s Close = Yesterday’s Close,then OBV = Yesterday’s OBVONE-DAY REVERSAL — See Island Reversal.OPTION — The right granted to one investor by another to buy (called acall option) or sell (called a put option) 100 shares of stock, or one contractof a commodity, at a fixed price for a fixed period of time. The investorgranting the right (the seller of the option) is paid a nonrefundable premiumby the buyer of the option.ORDER — See Limit Order, Market Order, and Stop Order.OPTIONS RESEARCH, INC. — Founded by Blair Hull, later of Hull TradingCo. The first company to computerize the Black–Scholes Model.OSCILLATOR — A form of momentum or rate-of-change indicator whichis usually valued from +1 to –1 or from 0% to 100%.OVERBOUGHT — Market prices that have risen too steeply and too quickly.OVERBOUGHT/OVERSOLD INDICATOR — An indicator that attempts todefine when prices have moved too far and too quickly in either direction,and thus are liable to a reaction.OVERSOLD — Market prices that have declined too steeply and too quickly.PANIC — The second stage of a Bear Market when buyers thin out andsellers sell at any price. The downward trend of prices suddenly acceleratesinto an almost vertical drop while volume rises to climactic proportions. (Seealso Bear Market.)PANIC BOTTOM — See Selling Climax.PATTERN — See Area Pattern.PEAK — See Top.PENETRATION — The breaking of a pattern boundary line, trendline, orSupport and Resistance Level.PENNANT — A Pennant is a Flag with converging, rather than parallel,boundary lines. (See also Flag.)
AU3772_book.fm Page 761 Saturday, November 18, 2006 5:29 PM
Glossary
761
POINT & FIGURE CHART — A method of charting believed to have beencreated by Charles Dow. Each day the price moves by a specific amount (thearbitrary box size), an X (if up) or O (if down) is placed on a vertical columnof squared paper. As long as prices do not change direction by a specifiedamount (the Reversal), the trend is considered to be in force and no newcolumn is made. If a Reversal takes place, another vertical column is startedimmediately to the right of the first, but in the opposite direction. There isno provision for time on a Point & Figure Chart.PREMATURE BREAKOUT — A breakout of an Area Pattern, then a retreatback into the pattern. Eventually, the trend will break out again and proceedin the same direction. At the time they occur, false breakouts and prematurebreakouts are indistinguishable from each other, or