A glossary of commonly used terms on the ShadowTrader SquawkBox and in our newsletters.
- Advance Decline The advance decline line for the NYSE or Nasdaq. This is a figure composed of a net sum of the number of advancing stocks minus the number of declining stocks at any given moment in each of the two respective markets.
- At the Market If ShadowTrader is initiating a position “at the market” it simply means that limit orders are not being used and the position is being entered with no regard to price. This is used much more often on more liquid Nasdaq issues.
- 15′s 15 minute charts. The primary timeframe utilized by ShadowTrader for intraday (day) trading.
- 60′s Hourly charts
- 20ma The twenty period moving average, often discussed in the context of a certain timeframe such as 15 minute chart or daily chart. All moving averages discussed in ShadowTrader are SIMPLE and not EXPONENTIAL.
- 50ma Fifty period moving average
- 200ma Two hundred period moving average, a key level especially on longer timeframes that many institutions trade against.
- Body Referring to the body of a candlestick or the area that is between its open and close, disregarding its swing highs and lows which are represented by the shadows or wicks.
- Beta A measure of volatility of a security in comparison to the market as a whole. In the broadcast we often say the stock has “big beta” when its a very volatile mover.
- Black Swan A market event that is completely unpredictable and often without historical precedent. The sell-off on 2/27/07 would be considered a “black swan” event. By the same token the advance that followed it within three weeks pushing the market quickly back over the highs of 2/27 and much further could also be characterized this way.
- Bottoming tail A candlestick pattern which is comprised of a relatively small body and a much larger shadow or wick which is pointing downwards (towards lower prices), indicating that within the time period of the candle, bears pushed prices low but by the end of the candle period were forced to retreat to an area either close to or above the open of the candle. Generally a bullish pattern, it requires that the tail or wick be at least twice the size of the body to be designated as a “tail”. It is the opposite of a Topping Tail and is often referred to as a “hammer”.
- Breadth Describing market breadth in terms of volume for the NYSE or the Nasdaq. This is a figure composed of the net sum of the amount of volume flowing into up stocks minus the amount of volume flowing into down stocks at any given moment in each of the two respective markets. Often the advance decline line is also referred to as “breadth”, but ShadowTrader differentiates between the two by using two separate terms. Generally, the Breadth is more important than the advance decline line.
- Bull & Bear Trap An opening gap type of daytrade in which the trader seeks to exploit the psychological shock that longer term traders feel when faced with a opening print that is strongly opposite the prior day’s price action. A bull or bear trap is created when the prior day’s price action is overly biased in one direction, and the next day opens in an area that negates the entire prior day’s move, thereby causing everyone who held the stock the day before in the expectation of greater gains to experience shock and head for the exit. For example, say XYZ has a very bullish day on Monday, opening at 74.20, making an intraday low of $74.10 and closing at $79.55, with an intraday high of $79.75. As you can see the stock opened close to the low of the day and closed close to the high, creating a “big body” candle on its daily chart. On Tuesday morning a catalyst occurs which causes the stock to open at $73.50. This negates the entire previous day’s price action and causes every investor who is still holding the stock long overnight from Monday to be “wrong”. The prior day’s bulls are now “trapped”, hence the name, Bull Trap. Reverse the whole scenario for a bear trap.
- Christmas Tree This is any time that the core sector list is split 50/50 with half of the sectors in the red (negative on day) and half in the green (positive on day). Usually signals “sit on hands” approach.
- Diamonds The tracking stock or ETF for the Dow Jones Industrial Average. Its symbol is DIA.
- Doji A candlestick pattern in which the open and close are the same (or almost the same). The pattern indicates extreme indecision as prices move up (to form the upper shadow) and then move sharply down (forming the lower shadow), only to end up closing very near where they originally opened at the beginning of the time frame in question. The pattern also indicates a contraction of volatility.
- Doldrums The time period between 11:30 and 1pm in the markets which is generally characterized by lower overall volume and lack of trend.
- Eighty Percent Rule A futures trading technique which operates under the assumption that if a market opens outside its value area (where 70% of the prior session’s volume traded) and then trades into value for two consecutive 30 minute periods, there is an 80% chance that the market will rotate all the way to the other side of value.
For example, lets say the value area in the /ES is 1275 – 1280 and the market opens on a gap down at 1270. During the course of the morning it trades higher and two 30 minute consecutive periods trade above 1275. There is now an 80% chance that the market will trade to 1280 before the end of the day.
Some important notes:
–Neither 30 minute period has to close inside of value in order for the rule to be satisfied, just needs to trade inside it.
If the first 30 minute period closes inside of value, then the rule is automatically satisfied as that implies that the second one will open inside of value. You need not wait for the second 30 minute period to close.
–The rule works both ways, whether the market is moving down from above the value area or up from below it.
–If the market opens up inside of value and then trades out of value, the rule applies the same way. If the market can trade back inside value for two consecutive 30 minute periods, then it has an 80% chance of rotating to the other side of value.
–Context is extremely important. Do not trade this rule mechanically and expect to have good results. Always judge the strength of any directional move in terms of market internals, overall pattern, tempo, and where the current range sits in relation to prior areas of balance.
- ES The S&P 500 e-mini contract. In the broadcast we use this as our primary instrument to define market direction and effect short term trades when we have a bias in the market. This is the electronic contract that trades around the clock, as opposed to the pit traded contract. Sometimes the pit traded version is called the “big contract”. Futures contracts on are denoted by two letters and then a letter and a number to define their expiration month. The ES has four contract periods per year which expire in March, June, September, and December. These four months are denoted by the letters H, M, U, and Z. For example, if it was 2012, then the March contract would be called the /ESH2. Thinkorswim requires a forward slash before the letters. Certain trading platforms and charting packages may denote this differently, either with or without the forward slash or putting a space somewhere between the letters and numbers such as ES H2.
- Fade When a stock moves opposite the direction of its gap on an intraday basis.
- Five & Fifteen Minute Rules When stocks gap up or down through or very close to stops, ShadowTrader uses what we call the “gap rule” to exit the position. In the same vein as the way that we often use price clearing first 5 minute or first 15 minute bars to determine “real” strength or weakness, we are not exiting positions on mechanical stops at the open because we know from experience that stocks often gap and reverse immediately and we don't want a GTC stop to be unnecessarily triggered. The rule of thumb is this: If a stock gaps down below the stop that has been established, wait for the first 15 minutes (up to 9:45am EST) to trade before doing anything. Then place a new protective stop just under (adjust this amount for the volatility of the issue) the low of that first 15 minutes of trade. Reverse this entire scenario for shorts.
If a stock opens close to the stop but not below it and trades down through the stop within the first 5 minutes of trade, then we use the “5 minute rule”. Again, we are not out of the position on the original stop, but rather will let the stock trade for a full 5 minutes (until 9:35am EST) before taking any action. Once 9:35 has elapsed, we place our new protective stop just under (adjusting the amount for the volatility of the issue) the low made in that first 5 minutes of trade. Reverse this entire scenario for shorts.
- Gox $GOX or $GOX.X The AMEX Gold Index.
- Head and Shoulders A technical pattern or chart formation where a stock’s price rises to a peak and subsequently declines. Then, price rises above the former peak making a higher high and again declines. Price then rises again, but not as high as the second peak and declines once more. These three peaks with the middle being the highest and lower highs on either side of it, create a pattern in the image of a silhouette of a head and shoulders where the first and third peaks are the shoulders and the second peak forms the head. The pattern is considered a bearish type of reversal. See also Inverted Head and Shoulders.
- High Volume Node or HVN An area inside of a market profile where a very large amount of volume has traded. These areas generally act as magnets in the market and when they are tested the market tends to slow or bog down in that area. Although the point of control from the prior session is the most obvious HVN to look for, such an area need not be from the prior session. It’s important to look at a profile that encompasses many days back to identify where past HVN’s are.
- Initial Balance The price range resulting from the market’s trade during the first two 30 minute periods of the regular trading hours session. For the /ES contract, this would be the 9:30 – 10:30am EST period. When the initial balance is relatively narrow, you should expect that it will be “knocked over” at some point in the session and price will extend out of the initial balance. This is called “range extension”. When the balance is wide, then look for the initial balance range to possibly be the range for the entire session. It is common that the highs and lows of the day will be established within the first hour of trade. Look for that to happen more often when the market is in balance or experiencing an Inside Day. When the market starts to trend right away off of the open and continues as such with little balancing anywhere, then there is no initial balance. On days like that, don’t look for the initial balance range to have any meaning.
- Initiating Activity A more one sided trade that takes place when the market pushes out and away from a current balanced area, into a new level where it establishes a new area of value. Initiating activity is generally dominated by the other time frame participants. When the market is experiencing initiating activity, you do not want to fade or go against the trend. You want to get aboard the train as early as possible and ride it to the next stop.
See Responsive Activity, Other Time Frame.
- Inside Day A day in which the entire range of price action from lows to highs is within or inside the prior day’s range. This pattern in candlestick terms is called “harami” and is a sign of a small pause in the prevailing trend before continuing onward rather than reversing.
- In-Between Periods Any time that is in between two reversal periods (See “Reversal Periods” below). Most often, however this call is made at roughly 10:15am EST. The theory being that the two main reversal periods of the morning session are the 10:00am and the 10:30. From experience we have found that when analyzing intraday action, the time around 10:15 am is either a continuation of a move that has begun in an earlier reversal period or a time of minor consolidation. Since the moderator uses 15 minute bars exclusively to reference intraday pivots, it has been found from experience that intraday entry on a 10:15 (ending at) bar does not statistically result in follow through of the pattern that defined entry. The 10:30am bar (ending at) has greater chance of producing follow through movement as it is at a reversal period rather than in between reversal periods.
- Internals Internals refers to “market internals” and is a blanket term to collectively describe the advance decline, breadth and trin indicators.
- Inverted Head and Shoulders A technical pattern or chart formation where a stock’s price falls to a trough and subsequently rallies. Then, price falls below the former trough making a lower low and once again rallies. Price then declines again, but not as low as the second trough and rallies once more. These three troughs with the middle being the lowest and higher lows on either side of it, create a pattern in the image of a silhouette of an upside down head and shoulders where the first and third troughs are the shoulders and the second trough forms the head. The pattern is considered a bullish type of reversal. See also, Head and Shoulders.
- Inverted A term used to define a situation when the major market averages or the internals are not either all positive or all negative. ie: the Dow is up and S&P and Nasdaq is down might be called out as “Head’s up, top line figures are inverted.” Basically, when we have inversion, its a signal of a choppy market that is rangebound at the prior day’s close.
- Jumbotron Stocks A short list of stocks that Brad and Peter watch closely every day for possible daytrading or option opportunities. We like these simply because they are expensive and move quite a bit in absolute dollar terms and often in percentage terms as well. The current list is: AMZN, BABA, BIIB, CMG, GOOGL, GS, IBM, ISRG, NFLX, NTES, PCLN, REGN, TSLA.
- Low Volume Node or LVN An area inside of a market profile where a very small amount of volume has traded. Usually an area that is “rejected” quickly by the market, thus the market does not spend a lot of time there. The theory is that when markets trade to these areas, they will be rejected again as these are areas that do not represent value in the market.
- Market Profile A way of reading the market that recognizes either time spent or volume traded at a particular price level. A market profile can be either made up of “TPO’s” (time price opportunities), or volume. TPO’s measure how much time was spent at a particular price, while volume-based market profiles measure how much volume traded at a particular price. Generally, market profile is used in the trading of futures, especially the /ES. ShadowTrader utilizes volume based profiles.
- Master Sector List Our daily “go to” as another form of market internal to discern overall market strength or weakness, ShadowTrader often monitors these sectors. Most of the larger capitalization (read: the market itself) companies are members of these groups. We monitor all of the sectors from their open as opposed to from the previous day’s close during the trading day. Mainly, we look to see how many of the 25 sectors are up and how many are down and see if that confirms with market action. If the trend is strong in one direction and is expected to continue, then you should see at least 20 or more of the sectors all moving in the same direction from their opens. When the list is more split, you can expect little directional followthrough in the market as the strong sectors are causing a push-pull effect on the S&P with the weaker sectors. The current list, in no particular order, with sector name and symbol on thinkorswim (as of December 2013) is as as follows. If using another software package note that the symbology may be slightly different.Amex Airline XAL
Dow Jones U.S. Healthcare Index $DJUSHC
Phlx Utility Sector UTY
Amex Tobacco TOB
Dow Jones U.S. Retail Index $DJUSRT
Dow Jones U.S. Software Index $DJUSSW
Amex North American Telecom XTC
Dow Jones U.S. Select Insurance Index $DJSINS
Dow Jones Transportation Avg $DJT
Amex Natural Gas XNG
Dow Jones U.S. Real Estate Index $DJUSRE
Amex Oil XOI
Phlx Semiconductor Sector SOX
Dow Jones U.S. Internet Index $DJUSNS
S&P Chemical CEX
Phlx Oil Services Sector OSX
Amex Securities Broker/Dealer XBD
Dow Jones U.S. Railroads Index $DJUSRR
Dow Jones U.S. Home Construction Index $DJUSHB
Dow Jones U.S. Coal Index $DJUSCL
Dow Jones U.S. Banks Index $DJUSBK
Amex Gold Miners Index GDM
Dow Jones U.S. Gambling Index $DJUSCA
- NQ The Nasdaq 100 E-Mini futures. In the broadcast we only discuss this contract in the pre-market to get a feel for where the Nasdaq will open.
- NYSE New York Stock Exchange
- On Balance Volume A technical indicator developed by Joe Granville, the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward (divergence) can be used to suggest that the “smart” traders are starting to exit their positions and that a shift in trend may be coming.
- Opposing Tails A situation on 15 minute charts (usually discussed in reference to $SPX or another index) where the shadows or tails of two consecutive 15 minute candles point in different (opposing) directions. This indicates extreme indecision on an intraday chart as bulls and bears pushed prices both low and high over the last half hour but at the end of that time period ended little changed.
- Other Time Frame A market profile term for those participants whose time frame and outlook is of a very long term, perhaps months or years. The theory is that it is these market players that are active when the market is experiencing initiating activity as opposes to responsive activity.
See Initiating Activity, Responsive Activity.
- Overhead or Supply When a stock or index suffers a down move, it is said that the area to the left of current prices which is higher is an area of “overhead” or “supply”. This is because we know that not all individuals on the way down were sellers. At all levels are buyers and sellers who are net long or short. As stocks move up back towards resistant areas we say that they have overhead or supply because we know that bulls will be waiting to “get their money back” as the stock rises back to levels that they purchased at.
- Pivot Points Below are the calculations for the floor trader pivots that are sometimes used in the broadcast and are listed daily in the ShadowTrader Pro Swing Trader. The high, low and close used in the calculation is from the prior day’s values. Generally these values are derived from the E-mini S&P futures, also known as “ES”. The pivots can be calculated using 24hour data or only trading hours only data. Although experimentation has proven both to be valid, we have found using trading hours only data to be more relevant as large gaps often put the pivot points too far outside of the market to be of any use. The "special sauce" is that we take the high and low in the futures that traded during equity trading hours only. So 9:30 to 4pm, even though each day's futures session actually ends at 4:15pm EST. For the closing value we take the settlement value from the CME as opposed to just the Last price at 4:15pm. The settlement value does NOT have to be exactly the same as whatever the 4:15pm LAST was. It usually is, but can be different by a couple of ticks or more. When at the site, refresh the page if necessary to make sure you have the correct day’s data on the screen. Write down the figure from that site and plug it and your high and low (from your intraday ES chart) into a simple Xcel with the formulas below. “R” means Resistance and “S” means Support.
PIVOT = (High + Close + Low)/3
R3 = High + 2(Pivot – Low)
R2 = Pivot + (R1 – S1)
R1 = (2*Pivot) – Low
S1 = (2*Pivot) – High
S2 = Pivot – (R1 – S1)
S3 = Low – 2(Hi – Pivot)
- Point of Control Also called “POC” for short. The level in the futures inside the value area where either the greatest amount of volume traded in the prior session, or the greatest amount of time was spent as measured by the number of TPO's going across. Measured this way, the POC would be the widest part of any given market profile. While ShadowTrader calculates its value areas and points of control using volume exclusively, we are always very aware of where the TPO POC is and it's relation to current prices or patterns in the profile. Both are very important.
- Q’sThe tracking stock or ETF for the Nasdaq 100 Index. Its symbol is QQQQ.
- Responsive Activity Two sided trade going back and forth between traders that have a short term outlook and are keeping prices contained within a range. For example, when a market trades to or even slightly above a defined range, if sellers become dominant and push the market back down lower, they are said to be “responding” to higher prices. This is the opposite of Initiating Activity. Responsive activity is usually defined by short time frame traders such as daytraders, or pit locals whose inventory has become imbalanced and needs to be corrected.
See Initiating Activity.
- Reversal Periods Generally the market tends to pivot or have inflection points at certain recurring times of the day. These times are 9:55-10:05, 10:25-10:35, 11am, 1pm, 2pm, 2:30pm and 3pm. ShadowTrader generally initiates positions around these time.
- Same Size Bodies A comment that often precludes “S.O.H.”, it is a market phenomenon when fifteen minute bars that are next to each other are lined up and have “bodies” of the same size where the last candle is a mirror image of the previous one. Also described as “Candles Lining Up”, it is a pattern that shows a very choppy market that may be untradeable intraday for the time being due to erratic price action.
- Sandwich Time The midday break in the broadcast between 11:30am and 1:30pm EST.
- S.O.H. Literally, “Sit On Hands”. A term used when the market is choppy or erratic and the odds of trades on either side of the market (long or short) have low odds of working out due to overall market indecision. This term is used often and is a warning against overtrading. Most professional traders are out of the markets much more than they are in them.
- Sox $SOX or $SOX.X. The Philadelphia Semiconductor Index. This index which tracks the leading chipmakers is discussed very often during the course of the trading day. Due to the heavy weighting of semiconductor companies throughout the Nasdaq Composite and Nasdaq 100 ($NDX), the Sox often “leads” the Nasdaq and is watched as another internal indicator alongside the breadth, trin and advance decline lines.
- Spiders The SPDR or S&P depository receipt which is traded as a proxy for the entire S&P 500. It trades similar to the DIA or QQQQ and its symbol is SPY.
- Stalking A form of “heads up” for clientele to know that an official trade call is more than likely coming soon on the symbol being stalked. Generally announced before an intraday trade, the term is however often applied to any stocks that are currently on our watch lists for possible position (swing) play.
- TPO (MP) Stands for "Time Price Opportunity". It is the smallest unit of measure displayed any market profile graphic, denoted by a single letter. Each TPO represents a point of time where the market being charted trades at a specific price. A single TPO is printed on the chart every time that a certain price is touched during any time period. Typically, the periods are set to 30 minutes. Therefore, every different letter that you see in the market profile distribution denotes a different 30 minute period.
- Tempo Probably one of the most important and yet overlooked concepts in the market. The tempo is simply the ‘speed’ at which the market is moving. This is also referred to as confidence. Slow tempo is typical of range bound days where there is lots of responsive activity. Fast tempo occurs when there is initiating activity, and market is breaking out of a range. This is not to say that the market can’t have fast tempo on days when it is rotational or moving between the extremes of a value area. It certainly can. Effective intraday futures trading involves gauging the tempo and knowing that opportunities are fewer and smaller when the tempo is slow.
- Topping Tail A candlestick pattern which is comprised of a relatively small body and a much larger shadow or wick which is pointing upwards (towards higher prices), indicating that within the time period of the candle, bulls pushed prices high but by the end of the candle period were forced to retreat to an area either close to or below the open of the candle. Generally a bearish pattern, it requires that the tail or wick be at least twice the size of the body to be designated as a “tail”. It is the opposite of a Bottoming tail, or Hammer pattern. Can also be called “inverted hammer”.
- Top-Line Figures The top line figures are nothing more than the current levels of the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite. Peter keeps these three numbers on the top line of a quote box on one of his screens so he started calling them “top line figures”. Its not a term he coined himself and would not be found on a site like Investopedia.com
- Top-Line Divergence A occurrence where the three major averages mentioned above are diverging from each other. During top line divergence, there is some combination of either one of the three being positive (up) with the other two negative (down) or one negative and two being positive. This indicates a choppy session as there is relative strength in some indices which may be acting as a drag on the others and vice versa. When the moderator calls out top line divergence generally the market is stuck in a range.
- Tick The net cumulative tick reading on the NYSE or Nasdaq Composite. This is measured by the number of stocks ticking up minus the number of stocks ticking down at any given moment. It is the least used of the internal indicators but is discussed from time to time. Generally the tick readings are only helpful when they are at extremes such as +1000 on the NYSE to indicate that program trading is ensuing.
- TOPS Tops refers to the highest or lowest possible price that will be accepted to enter a trade when bidding or offering using limit orders. Therefore if the moderator says “Shorting IBM at 84.60, 84.50 tops”, it means that limit orders between 84.60 and 84.50 are being used to enter the postion.
- TRIN The Traders Index, also called Arms Index after inventor Richard Arms. A complex fractional equation that takes into consideration the number of advancing stocks versus the number of decliners and also the respective volume of those two groups. Although TRIN readings over 1.0 are interpreted as bearish and readings below 1.0 are bullish it is the trend of the TRIN that is most important and any discussion of TRIN will always be in context of the trend.
- Value Area A range where approximately 70% of the prior days volume traded. The range is derived from one standard deviation on either side of the mean which is roughly 70%. See: Market Profile
- Value Area High The high end of the range of the value area.
- Value Area Low The low end of the range of the value area.
- VPOC, Virgin Point of Control Any Point of Control (POC) that has not been tested during regular session trading hours of 9:30am to 4:15pm EST.
- Zero Line A term we use to indicate parity in the internals. For instance if the breadth goes flat (advancing volume is equal to declining volume), we say its sitting at the ‘zero line’. We use this for breadth and also for the advance decline line.
- Zones 1,2,3 The zone analysis is a way of discerning whether or not the S&P (our main gauge of current market sentiment and direction) is trading within the upper, middle or lower third of the current day’s range. Once at least 45 minutes of trade have ensued, take horizontal line drawing tools on your charting package and draw one line across the high of the day on the SPY or the S&P 500 (SPX). Next draw another line along the low of the day. Then finish by drawing two more lines equidistant from each other and from the first two lines drawn so that the days range is divided into three equal thirds. Label the upper third “zone 1″, the middle third “zone 2″, and the lower zone “zone 3″. The thinking here is that when the market is trading in zone 1, there is an increased chance that stocks will break higher and traders should favor longs if trading intraday. When the market is trading in zone 3, the chances increase of a move lower and shorts should be favored if trading intraday. When the market is trading in zone 2, there is essentially equal chance that the market can break in either direction and intraday trading should essentially be avoided. The longer the market stays in the this middle third over the course of the trading day, the “choppier” it is. Zone 2 is the area most mentioned by the moderator because through experience we have found that the most difficulty in predicting short term market direction comes when the market is just treading water in a range (also known as ‘backing and filling’ or ‘chopping’).