Chapter 14 Part 6 Flashcards
The odd-lot theory focuses on the trading activity of small investors. These investors are commonly called odd-lotters since they usually buy and sell odd-lot amounts (less than 100 shares). This theory states that small investors are usually
incorrect in their market timing. They will purchase when the market is at its highest and sell when it is at its lowest. Statistics are kept that track the buy and sell orders of odd-lot transactions and are published each day. Technical analysts will instruct their clients to buy when odd-lot sell orders increase relative to odd-lot buy orders. A sell recommendation will be issued when odd-lot buy orders increase relative to odd-lot sell orders.
Advance-decline figures measure the
number of stocks that have increased versus the number of decreasing issues for a trading session or other period. This data, which tends to show the direction of the market as well as the breadth of a market movement, is published daily. According to this theory, a positive advance-decline figure (more advancing issues than declining issues) is bullish. However, it is considered bearish if the market averages (such as the Dow Jones Industrial Average) are up but the advance-decline figures are negative
The Dow Theory attempts to determine changes in the underlying trend of the market. Historically, Dow theorists have looked to the Dow Jones averages for this information. According to this theory, a major trend is confirmed only when
both the Dow Jones Industrial Average and Transportation Average reach a new high or new low. Without this confirmation, the market will drift back to its previous trading pattern.
area of resistance or the resistance level
when the market {or stock) rises to a particular price level, increased selling pressure prevents a further rise in price
support level
a stock may decline to a point where analysts believe it is oversold and, therefore, more buyers enter the market. This increased buying (demand) puts a noor under the price
A breakout occurs when
the stock’s price either increases above a resistance level or declines below a support level. When this happens, a technical analyst believes the price of the stock will continue on its course.
A breakout above the resistance level is considered a
bullish signal. To profit from this, investors would enter a buy slop order slightly above the resistance level. As the stock’s price increases above resistance, the order will be executed. Investors will profit as the stock continues to increase in value. Another alternative is for investors to purchase call options on the stock once the breakout has occurred.
A breakout below the support level is a
bearish signal. Investors would want to sell short slightly below the support level. This could be accomplished by entering a sell stop order below the support level. Another method would be to purchase put options on the stock.
A head and shoulders formation indicates the
reversal of a trend. A head and shoulders top formation is bearish as it signifies the reversal of an upward trend.
An inverted head and shoulders formation (also called a head and shoulders bottom) is the opposite of a head and shoulders top. This pattern is the
reversal of a downward trend and is considered a bullish signal.
A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a
bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock.
The reverse or the saucer pattern is the
inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator.
