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Technical Analysis Explained

Sentiment or Contrarian Opinion

During primary bull and bear markets the psychology of all investors moves from pessimism and fear to hope, overconfidence, and greed. For the majority, the feeling of confidence is built up over a period of rising prices, so that optimism reaches its peak around the same point that the market is also reaching its high. Conversely, the majority is most pessimistic at market bottoms, at precisely the point when the acquisition of stocks should be taking place. The better-informed market participants, such as insiders and stock exchange members, act in a contrary manner to the majority by selling at market tops and buying at market bottoms. Both groups go through a complete cycle of emotions, but in completely opposite phases. This is not to suggest that members of the public are always wrong at major market turns and that professionals are always correct, but that in aggregate the opinions of these groups are usually in direct conflict. Data is available on many of these market participants, so that over a period of years it has been possible to derive parameters that indicate when a particular group has moved to an extreme, historically associated with a major turning point. For a better understanding of the "theory" we refer to figure 43 that shows an extract of the "Market Vane's Bullish Consensus" and in figure 44, a comparison with the price chart for USD/DEM.

Market Vane's Bullish Consensus

Figure 43

Figure 44

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Vocabulary

A
Apex
Arithmetic scale
Art-charting
Ascending triangle

B
Bar-chart
Bearish engulfing pattern
Bottom-line
Bullish Consensus
Bullish engulfing pattern

C
Candle Stick /-chart 1, 2
Channel formation
Chart
Chartist
Closing prices
Complete cycle
Consolidation
Continuation formations
Contrarian Opinion
Corrective waves
Cycle lines

D
Descending triangle
Divergence
Daily close
Doji
Double top/bottom
Down-trendline
Dow Theory

E
Edge band analysis
Elliott-Wave
Engulfing pattern
Exponential moving average

F
Fibonacci-numbers
Fibonacci time zones
Five-wave
Four-weekly-rule
Flag
Fundamental Analysis

G
Golden section /ratio (phi)

H
Hammer
Hanging man
Head and Shoulder
High
Horizontal triangle

I
Impulsive waves

L
Larry Williams %R
Line-chart
Logarithmic scale/chart
Long term
Low
Low-risk entry point
Lunar cycle

M
MACD (moving average convergence/divergence)
"Markets Vane"
Medium term
Momentum
Monthly close
Moon cycles
Moving Average
M-Top

N
Negative or bearish divergence
Non-trending indicators

O
Oscillator
Opening

P
Peak
Pennant
"Phi"
Point and figure
Positive or bullish divergence
Price formation
Price objective
Psychological rationale

R
Rate of Change
Ratio
Real Body
Resistance
Rounding bottom/top
Relative Strength Index (RSI)
Reversal criteria/formation 1, 2

S
Saucer
Sentiment
Short term
Sideways trend
Simple Moving Average
Spiral Calendar
Stochastic
Stop-loss/Stop
Stop-profit
Support
Symmetrical triangle

T
Technical Analysis
Technical Analyst
Technical indicators
Three-wave
Time Cycles
Time frame
Timing
Top-line
Trading
Trading signals
Trend
Trending indicators
Trendline
Triangle
Trigger levels
Troughs

U
Up-trendline

V
Volume

W
Weekly close
Wedge
Weighted moving average
Whipsaw

Z
Zero line