Explaining the Terminology

This listing of terms used is by no means complete, and I will add to it as time goes on, and as people ask for the explanation of terms I may have missed.

• The 200 Day Moving Average (200DMA).  This is one of the most popular averages used by traders and investors.  It is arrived at by taking the closing price of a stock or commodity, for the past 200 days, and adding these up, then dividing by 200.  Every day we drop the ‘oldest’ price, and add today’s price.  This keeps the average ‘moving’.  When I first began to trade, we did this with an adding machine, then with a calculator.  Today the various websites such as www.stockcharts.com and www.bigcharts.com do it automatically.

• The 50DMA.  Same principle as the 200DMA.  This average is used when a stock is moving rapidly, and has gotten away from the 200D.  Traders and investors tend to buy above the moving averages, especially when these averages are moving up, and sell when price falls below the MA’s, using pre-determined stops.

• RSI or Relative Strength Index.  This index is located at the top of the chart created at Stockcharts.com.  It is an index that measures the relative strength of a move.  It tends to oscillate between 30 an 70 .  Many traders buy near 30 and sell near 70 .  It can also be used as a confirmation or non-confirmation of a move.

• Confirmation, or Non-Confirmation:  Ideally, when price is rising, the RSI and MACD should also be rising.  You should be able to print a chart, draw a line across the high points of Price, RSI and MACD, and all three lines should be rising.  When price is rising, and the RSI and MACD are declining, we call that ‘non-confirmation’, and it usually portends that there is price weakness ahead.

• MACD, or Moving Average Convergence Divergence.  This is another oscillator, based on a combination of short-term moving averages.  It is somewhat similar to the RSI, except that it moves slower.  It is also useful as a ‘confirmation’ or ‘non-confirmation’ tool.  Generally speaking, traders tend to buy when the MACD is bottoming below .00, and the thick line crosses above the thin line.  Traders tend to sell when the MACD turns down above .00 and the thick line crosses below the thin line.

• ARAT or Advancing Right angled Triangle.  This is a chart formation where the low points in the price chart are gradually rising, as each subsequent low is higher than the precious low.  At the top of the formation is an area where sellers have thus far been able to stop the advance.  On a print-out of the chart one can usually draw a horizontal line across these tops.  A breakout from the horizontal line is a buy signal for a lot of traders.  Some get in right away, others who may have missed the breakout, join in as soon as the breakout is tested (as is the case in most of these breakouts).  The target for a breakout from an ARAT is usually the length of the resistance line moved up vertically.  Thus the longer the resistance has existed, the higher the price can be expected to rise.

• Cup with handle formation.  A CWH formation is a chart formation with 2 rims, and the formation of a ‘handle’.  The left rim is a previous high, followed by profit taking which runs out of steam, and the market begins to rise again.  As soon as price gets to the area where the left rim was formed, sellers drive the price down again, creating the right rim of a ‘cup’.  This time the sellers are unable to drive the price down very far, and a see-saw battle takes place between buyers and sellers, creating a ‘handle’.  The more obvious the pattern, and the longer it takes for the handle to form, the more reliable will be the upside breakout, as by now a lot of people are eyeballing the formation.  The target for a breakout from a CWH formation is usually the depth of the cup flipped up vertically, above the cup.  Thus the deeper the cup, the greater the up move that follows the breakout from the handle.

• Breakout.  This term is no doubt familiar to the reader, however, there are two kinds.  The first is a breakout with accompanying volume.  The second is without volume.  The first is reliable, and to be participated in, while the second should draw suspicion, and will often turn out to be a ‘head-fake’.

• Stops.  A stop is a predetermined price, where the trader decides to exit, if the trade goes in an opposite direction than planned for.  It is recommended, especially for novice investors, that stops should be used.  A stop allows you to pre-determine how much a trade will cost you, in the event that the market moves in the opposite direction to your expectation.  The best place for a stop is below an area of congestion when you are ‘long’, or above the area when you are ‘short’

• Long and Short.  An investor is deemed to be ‘long’ when he or she buys a stock or commodity, and ‘short’ when he or she sells without owning the item.  By going long, you own the item for an indefinite period of time.  By going short, you will at some point have to ‘cover’ or liquidate the position.  If the item rose in value between the time you ‘sold short’, and ‘cover’, you lose money.  If the item dropped in value in the interim, you made money.

• Buying or selling ‘on stop’.  To take advantage of a breakout from congestion, some traders use an ‘on-stop’ order.  This type of order is automatically executed by the exchange, when the stock’s price touches the price designated by the trader.  Some traders, myself included, use mental ‘on stop orders’.  We make a note of the potential price breakout, and by watching the market continually, spot the breakout as it occurs.  Then we take action by placing an order.

NOTE:  A breakout must ideally go through the resistance from below in case of an upside breakout, or from above in the case of a downside breakout. F.e  If a trader intends to buy a breakout at 1.01 on a stock that closed at 0.95 the day before, and the stock opens at 1.05, then we do not have a actual breakout, but a ‘breakaway gap’.  Sometimes these keep going, but more often than not, price first drops back to ‘test’ the breakaway.  Sometimes a stock that behaves in this manner will attract sellers who push the stock down below the closing price of the previous day, and you end up with a ‘downside reversal’.

• Reversals.  An upside reversal occurs when the price first moves below the low point of the range carved out during the previous day, and closes above the closing price of the previous day.  A downside reversal occurs when the price first moves above the high point of the range carved out during the previous day, and closes below the closing price of the previous day.  Some people call these:  ‘Climaxes’.

• ABC tops or bottoms.   An ABC bottom occurs quite often.  By way of example, a given stock drops down to 5.00 and begins to rise.  We will place a letter A below the 5.00 .  When price subsequently reaches 7.00 it may run out of steam and starts down again.  This is the B point.  Price goes down as far as 6.00, and begins to bottom out and rise again.  As soon as you are convinced that price is rising up and away from 6.00, you have a C point.  Traders use ABC entry points, as they can place a protective sell stop either below A or below C, depending on how much risk they are willing to take on.  An ABC top is the exact opposite to this example.

• A flag or pennant.  This type of chart formation often occurs when a stock has been ‘hyped’ by an analyst with a large following, or upon release of very positive news on a given stock.  The stock shoots up vertically, until short-term traders start taking profits.  The formation is that of a ‘pole’.  As traders sell, other traders are just now learning of the stock, and not wishing to be left behind, begin to buy when the price has retreated a bit from the top of this ‘pole’.   A tug-of-war takes place between buyers and sellers, and a ‘flag’ or ‘pennant’ is created.  The temptation to buy into this formation is the knowledge that in more than 50% of the upside breakouts from a pennant, the resulting up move equals the distance of the ‘pole’.

• Support lines.  Many traders print out a chart of a given stock, and with a ruler, draw in a line that connects the low points in a price pattern.  This line is the ‘support line’, and if this line touches three or more of these rising low points, it becomes a fairly reliable ‘guard-rail’.  Traders then buy just above this support line, even adding onto existing positions, and often abandon the stock if this  line is violated on a closing basis.

• Resistance line.  Many traders do the same to determine the resistance line, by connecting the tops in the chart.  If the resistance line is clearly defined, they often sell the next time price touches or comes near this resistance line.

• Gaps:  These are empty spaces on a bar chart, caused by an absence of sellers when price is moving up, or an absence of buyers when the market is dropping.  An example is when the company issues some drastic or exciting news during the off hours, causing traders to dramatically change their perception of the value of the stock.  In more than 50% of instances these gaps are filled within a year.  Some gaps however, especially high volume ‘breakaway gaps’ are never filled.
  
  
• Head and Shoulders formation.  The chart pattern will have a high point at say 8.00, followed by a small correction to 7.00, then a new high at 10.00, then a correction to 7.00.  Next comes an attempt by the bulls to establish a new high, but price only goes up to 8.00 and begins to falter.  The result is a chart pattern that looks somewhat like a ‘head and shoulders’ formation, (8, 10, 8).  The expectation is a move away from the ‘head’, with a target estimated to be the length of the distance from the top of the head to the neckline.  A head and shoulders formation also occurs upside down, as a bottoming pattern.

• T.A. or Technical Analysis.  The application of some, or all of the above, to determine when to buy and when to sell, once the fundamentals of a stock or commodity have been ascertained.

• A ‘Secular Market’ is a major long term bull or bear, after three years. 

• The ‘Generic’ market is a term used to describe the overall market.  It applies to the Dow or S&P stocks in general, as opposed to a particular sector.

• The HUI index.  This is an index consisting of the following 15 stocks: AEM – CDE – EGO – FCX – GFI – GG – GLS – GOLD – GSS – HL – HMY – IAG – KGC – MDG – NEM.  It is sometimes referred to as the ‘gold bugs index’.  All of these stocks are ‘non-hedgers’ (they do not sell future production, as did f.e. Barrick, the most notorious hedger of them all).  The index is arrived at by adding up the current price of all the stocks, then dividing by 15, and using a pre-determined formula, the authorities come up with a number which changes whenever the stocks are being bought and sold, and is constant when the market is closed.  It is a good indicator of the general direction of the market.  There are two other mining stocks indicators, XAU and GDM.  These two indexes DO include hedging producers.

• Inflation.  Monetary inflation is misunderstood by the vast majority of people.  Monetary inflation is the increase in the money supply without the addition of gold or silver to back the increase.  The result of this action is price inflation.  Price inflation can occur immediately following the monetary inflation, or it can take years to show up.  One effect of monetary inflation can be, and often is: ‘stagflation.

• Stagflation is a combination of the words:’ stagnation’ (a stagnant economy), and ‘inflation’ (in this instance – price inflation).  Stagflation is a period where GDP (Gross Domestic Product) slows down, price inflation increases, and as a result net disposable income declines.

• POG = Price of Gold.  POS = Price of Silver.  PM = Precious Metals.  In mining reports, AU = Gold.  AG = Silver.  CU = Copper.  PGM = Platinum group Metals.  ZN = Zinc. MO, or MOS2 = Molybdenum.  PB = Lead.  BOE/D = barrels of Energy produced per day.  JV = Joint Venture, usually between an exploration company (that has found a resource, but does not have the capital, the expertise or the facilities to bring a property into production), and a major or intermediate producer.

• National Instrument 43-101 compliant.  This is a rule developed by the Canadian Securities Administrators (CSA), and administered by the Provincial Securities Commissions.  The rule governs how issuers disclose scientific and technical information about their mineral projects to the public.  It covers oral as well as written statements, including website information.  It requires that all disclosures be based on advice from a ‘qualified person’, and in some cases that this person be independent of the property and from the owners of the property.  (For more details please visit www.google.com and type in ’43-101 compliant’).

• Tons versus tonnes.  A metric tonne is heavier than a US ton.  A metric tonne equals +/- 1.1 US ton, or app. 2,200 lbs.  WMT = Wet Metric Tonnes

• CBM or Coal Bed Methane.  This is the gas that is found at the top of coal resources.  It is a dangerous gas, and it requires special technology to drill for it, the cap it, so it can be tapped and produced.

• Market cap.  This is the total value of the company.  It is found by multiplying the number of shares by the last price of the stock.  Sometimes it can be the number of ‘tradeable shares’ (undiluted).  Sometimes it can be the total number of shares, including options, warrants and shares still in the treasury (fully diluted).. an easy way to find out the market cap of any Canadian resource stock is to visit www.mineralstox.com and register to become a member.

• Registered and Eligible.  Commodities, f.e. silver stored at the Nymex warehouse, are either ‘registered’, (commodity is ready to be delivered to the owner of a ‘long’ contract), or the commodity is ‘eligible’, (not yet registered – most likely held by a longer-term investor, who is waiting for higher prices).

• OTC or ‘over-the-counter’.  The stocks sold OTC are not trading at an official exchange.  They are bought and sold through brokers who make a market in these stocks.  Investors should only buy or sell OTC or ‘Pink’ stocks with specific price indicated.  Never buy or sell these ‘at the market’.

• SX-EW or Solvent Extraction Electrowinning.  A method of treating ore.

• BROKER: One who is likely to leave you ending up broke.  Three months before Enron collapsed 14 out of 18 major Wall St. ‘brokers’ were still recommending Enron as a ‘buy or hold’.

• Happy Trading!

 

Bio | Site Map | Privacy Policy | Contact Me | ©2007 Peter Degraaf