CMT

Key Terms Glossary

WCID198
CMT KE Y TERMS GLOSSARY 2

Introduction
The language of technical analysis can be filled with jargon, unnecessarily obfuscating attempts to
understand and interpret price action. Many people do not know what is meant by “overbought” or
“divergence” - words which have rich meaning to a technical analyst.

This glossary is not intended to be a course in technical analysis, but rather to demystify the
buzzwords with straightforward definitions. The official CMT Program curriculum offers a complete
course of self-study leading to a credential in the discipline. The texts are available for purchase to
candidates in the program and the general public.

A
ACCUMULATION
Process by which excess supply of stock is absorbed by expanding demand that has a favorable effect on the price
over a period of time. Generally, it is a period of price equilibrium following a decline.

ADVANCE-DECLINE LINE
Number of stocks advancing less the number of stocks declining over a particular period.

ADVISORY SERVICES
Newsletters that comment upon and attempt to forecast the course of various markets. They tend to be trend
followers and are often overly bullish at tops and overly bearish at bottoms.

APEX
Point of intersection of two trend lines; the usual connotation that some new trend may evolve as prices approach
that intersection.

ARBITRAGE
Simultaneous buying in one market and selling in another market to take advantage of differences in price.

B
BACK AND FILL
Same as Consolidation. See also Stabilization.

BAR CHART
Price/time chart that depicts high, low, and close data as bars on the vertical axis and time intervals on the
horizontal axis. Volume is often included as vertical bars on the bottom of the chart beneath the price data.
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BASE
Period of accumulation (see above). Also called “Bottom.”

BEAR MARKET
A period when the general trend of securities prices is down.

BEAR TRAP
A false move to the downside that does not initiate a new downtrend but is the final reaction prior to a sustained
advance, hence “trapping the bears.”

BEHAVIORAL FINANCE
A combination of psychology and economics that attempts to explain the reasoning patterns of investors, including
the emotional processes involved and the degree to which they influence the decision-making process. Essentially,
it attempts to explain the what, why, and how of finance and investing, from a human perspective. (Derived from
the work of Dr. Richard Thaler.)

BLOCK
A single transaction of a large number of shares or contracts.

BLOW OFF
The final phase of an uptrend, ending a mark-up phase, when prices rise very rapidly, usually on high volume,
leading to a sharp reaction. See “Climax.’

BREADTH
Net number of stocks advancing versus declining. When advances exceed declines, breadth is positive; when the
reverse is true, breadth is negative.

BREAKDOWN
Like “Breakout” but used to refer to the downside.

BREAKOUT
When price exceeds a previously recorded high or low (or resistance or support level) or some other predetermined
criteria. Also called “Penetration.’

BULL MARKET
A period when the general trend of securities prices is up.

BULL TRAP
A false move to the upside that does not initiate a new uptrend but is the final rally before a sustained decline,
hence “trapping the bulls.”
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C
CANDLESTICK CHARTING
A method of charting prices that emphasizes the relationship between the opening and closing prices of each
period. Particularly useful in identifying trend reversals.

CHART
A general reference to graphic displays of price and volume data as well as technical indicators.

CHURNING
Hesitation in a trend, usually leading to a reaction. Volume is normally relatively high (after an advance) with limited
price progress.

CLIMAX
(Climatic low point or climactic highpoint). A sudden end to a trend, accompanied by high volatility and high
volume.

CONFIRMATION
Two or more indexes or trend measures extending their trends to new highs (or lows) at the same time. The
implication is confidence that the trend will continue. Often said of the Dow Jones Industrial Average versus the
Dow Jones Transportation Average.

CONSOLIDATION
A pause in a trend with the expectation the trend will be resumed in the same direction. Usually considerably
shorter in time than Stabilization.

CONTINUATION PATTERN
Consolidation phase that temporarily interrupts an up or down move and sets the stage for another move in the
same direction later, usually of short duration.

CORRECTION
A movement in the opposite direction of a trend that does not break or reverse that trend. Usually longer in time
than a reflex rally or reflex reaction.

D
DISTRIBUTION
Process in which demand for a stock is overcome by expanding supply, having a negative effect on the price of a
stock. It is generally a period of trend neutrality in price, but often has high volatility.
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DIVERGENCE
One index or trend measure failing to extend its trend to a new high (or low) while another measure does. This leads
to less confidence in continuing the trend. Often said of the Dow Jones Industrial Average versus the Dow Jones
Transportation Average. Opposite of confirmation.

DOWNTICK
A transaction that occurs at a lower price than the previous transaction.

E
ELLIOTT WAVE PRINCIPLE
Method of trend analysis based on counting and measuring sequences of price movement.

EXTENDED
When a stock has advanced or declined to or beyond its trend parameters and a consolidation is anticipated.

F
FINANCIAL FUTURES
Futures contracts based on financial instruments such as U.S. Treasury Bonds, Fed Funds and other interest rate-
sensitive issues, currencies and stock indexes.

FUTURES CONTRACT
Exchange-traded contracts that give the parties the obligation to receive or deliver a product or financial
instrument (or cash in lieu of the product or instrument) at a specific price on a specific date. Futures are used by
businesses to hedge against unfavorable price changes and by speculators who hope to profit from such changes.

G
GAP
When a stock’s high and low prices on a given day do not overlap the stock’s high and low of the previous day. When
a gap initiates a trend, it is called a breakaway gap; an exhaustion gap ends or reverses a trend, and measuring gaps
usually occur halfway through a trend.

I
INSIDERS
Officers, directors, shareholders and others privy to non-public information that affects a company’s stock.
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L
LIQUIDATION
Phase following distribution, when prices decline relatively easily.

LIQUIDITY
Ability of the market to absorb significant increases in volume with minor price fluctuations.

M
MARKET ANALYSIS
Also known as “Technical Analysis:’ The study of supply/demand relationships, investor psychology, monetary
changes, and the study of price and volume movements of the market as a whole, and individual stocks in
particular, in order to determine the probability of direction and degree of future price movements.
Whereas fundamental analysis is concerned with the company (and its sales, earnings, products, management,
etc.), technical analysis is concerned only with the stock of the company (i.e., the changes in the supply/demand
relationship for the stock in the market place).

MARKUP
Phase following accumulation when prices rise relatively easily.

MOMENTUM INDICATORS
Market indicators generally related to price and volume which attempt to determine overbought and oversold
conditions and the underlying strength or weakness of current market trends.

MOVING AVERAGE
Average of price or volume over a period of time that is used to smooth trends or minor fluctuations.

O
ON-BALANCE VOLUME
A cumulative volume figure, the direction of which depends on price movement; i.e. a positive change in
price indicates the volume for that particular time interval is positive while a negative price change indicates
negative volume.

OPTION
The right (but not the obligation) to buy or sell a specific quantity of a specific security at a fixed price within a
specific time. An option giving the buyer the right to purchase a security at a fixed price is a “call” option; an option
giving the buyer the right to sell the security at a fixed price is a “put” option.
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OSCILLATOR
An indicator that measures the strength of momentum (or sentiment) by moving to a positive or negative extreme
around zero or other central value.

OVERBOUGHT
A condition in which prices are relatively high, or have moved up quickly, as measured by oscillators or other
indicators.

OVERSOLD
A condition in which prices are relatively low, or have moved down quickly, as measured by oscillators or other
indicators.

P
POINT AND FIGURE
A method of recording price activity without reference to time. This method is concerned only with price trends and
changes in price trends.

PREMIUM
The price of an option as determined in the open market.

PRICE POTENTIAL OR OBJECTIVE

Technical appraisal of a stock’s future value. May be based on the upper or lower boundary of a trend channel, a
point and figure projection or the next significant support or resistance level.

PRIMARY OFFERING
A public sale of newly issued stock.

PULLBACK
See “Reflex Reaction”

R
REBUILDING
See “Stabilization.”

REFLEX RALLY OR REFLEX REACTION

Movement against a stock’s trend that does not break or reverse the trend but merely corrects an overbought or
oversold condition. Also called “Pullback.”
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RELATIVE STRENGTH LINE

The line that represents a stock’s (or group’s) price performance compared with a broad market index (or a group
or another stock). It is computed by dividing the price of a stock by the market index over time and plotting a line of
the resulting ratios.

RESISTANCE
A price level at which selling is expected to exceed demand and temporarily stop or reverse an advance. Opposite of
“Support:’

REVERSAL PATTERN
A characteristic chart pattern that signals the end of an up or down move.

S
SECULAR TREND
The trend that encompasses two or more cyclical trends (also two or more economic cycles) and often lasts 10 to 20
years or more. Also called the “Super Cycle:’

SENTIMENT INDICATORS
Indicators used to gauge changes in the psychology underlying market action.

SHAKEOUT
A sharp reaction (usually in an uptrend or base) that temporarily violates a trend line or support level, but quickly
reverses to the original trend. Traders are “shaken out” of long positions on the violation but stronger holders
(investors) retain their positions.

SHORT COVERING
Buying to cover short positions in stocks or futures.

SHORT SELLING
Selling stock that is not owned (usually borrowed), normally in anticipation of a price decline.

STABILIZATION
A period of sideways price action, usually before a trend is reversed. Sometimes called basing or accumulation after
a decline, and top formation or distribution after an advance.

STOP POINT
The price level which, if exceeded (on the downside in a long position; on the upside in a short position), breaks the
trend or negates a reversal pattern. That point is usually below a support level or above a resistance level.

SUPPORT
A price level at which buying is expected to exceed supply and temporarily stop or reverse a decline. Opposite of
“Resistance.”
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T
TECHNICAL ANALYSIS
Methods of price analysis focused on the interaction of buyers and sellers in the open market for financial
instruments. The goal is to assist in understanding and interpreting market action, identifying price trends and
managing risks. The raw data for technical analysis is price and volume and related statistics and calculations.

THEORETICAL VALUE
The value of an option calculated by considering (1) the difference between the option’s exercise price and the price
of the underlying asset (stock, commodity, currency or index) and (2) the time left until the option’s expiration (3)
and volatility.

NET TICKS
Net of upticks minus downticks.

TICK VOLUME
An intraday measure of activity that is found by counting the number of transactions.

TOP
Period of distribution.

TREND
The overall direction of prices over a given time period. The core focus of technical analysis is the identification of
price trend under the theory that price trends persist.

TRENDLINE
A line on a price chart used to identify a trend and its possible future levels. Its location may be found manually
(visually) or mathematically.

TRADING RANGE
Upper and lower boundaries of a stock’s or index’s price range. Normally, a neutral or horizontal trend is implied.

TREND CHANNEL
Two parallel trend lines that contain between them all or most of the price movement.

U
UPTICK
A transaction that occurs at a higher price than the previous transaction.
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V
VIX
An index measuring the market’s expectation of volatility, based on a wide range of S&P 500 index options.

VOLATILITY
Any of several measures of price fluctuation. Volatility is not necessarily correlated with price direction.

VOLUME
Number of shares or contracts traded during a specific time period; usually represented as vertical bars at the
bottom of a chart.

Z
ZERO DOWNTICK
A transaction that occurs at the same price as the previous transaction, but lower than the last different price.

ZERO UPTICK
A transaction that occurs at the same price as the previous transaction, but higher than the last different price.

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