(13) Technical Analysis Flashcards
LOS 13. a: Explain principles of technical analysis, its applications, and its underlying assumptions.
Underlying all of technical analysis are the following assumptions:
- Prices are determined by investor supply and demand for assets.
- Supply and demand are driven by both rational and irrational behavior.
- While the causes of changes in supply and demand are difficult to determine, the acutal shifts in supply and demand can be observed in market prices.
- Prices move in trends and exhibit patterns that can be identified and tend to repeat themselves over time.
LOS 13. b: Describe the construction of different types of technical analysis charts and interpret them. Why do they use charts?
Technical analysts use charts to identify trends and patterns in prices over time.
LOS 13. b: Describe the construction of different types of technical analysis charts and interpret them. Define line chart?
A line chart is a continuous line that connects closing prices for each period.
LOS 13. b: Describe the construction of different types of technical analysis charts and interpret them. Define bar charts and candlestick charts.
Bar charts and candlestick charts show the open, high, low, and close for each period.
LOS 13. b: Describe the construction of different types of technical analysis charts and interpret them. Define point and figure chart.
Point-and-figure charts indicate significant changes in the direction of price trends.
LOS 13. b: Describe the construction of different types of technical analysis charts and interpret them. Define volume chart.
Volume charts often accompany price charts.
In capital markets, volume, or trading volume, is the amount (total number) of a security (or a given set of securities, or an entire market) that were traded during a given period of time. In the context of a single stocktrading on a stock exchange, the volume is commonly reported as the number of shares that changed hands during a given day.
LOS 13. c: Explain uses of trend, support, resistance lines, and change in polarity.
In an uptrend, prices are reaching higher highs and higher lows. An uptrend line is drawn below the prices on a chart by connecting the increasing lows with a straight line.
In a downtrend, prices are reaching lower lows and lower highs. A downtrend line is drawn above the prices on a chart by connecting the decreasing highs with a straight line.
LOS 13. c: Explain uses of trend, support, resistance lines, and change in polarity.
Support and resistance are price levels or ranges at which buying or selling pressure is expected to limit price movement. Commonly identified support and resistance levels include trendlines and previous high and low prices.
LOS 13. c: Explain uses of trend, support, resistance lines, and change in polarity.
The change in polarity principle is the idea that breached resistance levels become support levels and breached support levels become resistance levels.
LOS 13. d: Describe common chart patterns. Reversal patterns.
Technical analysts look for recurring patterns in price charts. Head-and-shoulders patters, double tops, and triple tops are thought to be reversal patterns at the ends of uptrends. Inverse head-and-shoulders patterns, double bottoms, and triple bottoms are thought to be reversal patterns at the ends of downtrends.
LOS 13. d: Describe common chart patterns. Continuation patterns.
Triangles, rectangles, flags, and pennants are thought to be continuation patterns, which indicate that the trend in which they appear is likely to go further in the same direction.
LOS 13. e: Describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and flow of funds).
Price-based indicators include moving averages, Bollinger bands, and momentum oscillators such as the Relative Strength Index, moving average convergence/divergence lines, rate-of-change oscillators, and stochastic oscillators.
These indicators are commonly used to identify changes in price trends, as well as “overbought” markets that are likely to decrease in the near term and “oversold” markets that are likely to increase in the near term.
LOS 13. e: Describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and flow of funds).
Price-based indicators include moving averages, Bollinger bands, and momentum oscillators such as the Relative Strength Index, moving average convergence/divergence lines, rate-of-change oscillators, and stochastic oscillators.
These indicators are commonly used to identify changes in price trends, as well as “overbought” markets that are likely to decrease in the near term and “oversold” markets that are likely to increase in the near term.
LOS 13. e: Describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and flow of funds).
Sentiment indicators include opinion polls, the put/call ratio, the volatility index, margin debt, and the short interest ratio.
Technical analyst often interpret these indicators from a “contrarian” perspective, becoming bearish when investor sentiment is too positive and bullish when investor sentiment is too negative.
LOS 13. e: Describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and flow of funds).
Margin debt, the Arms index, the mutual fund cash position, new equity issuance, and secondary offerings are flow-of-funds indicators.
Technical analyst often interpret these indicators from a “contrarian” perspective, becoming bearish when investor sentiment is too positive and bullish when investor sentiment is too negative.
LOS 13. g: Describe the key tenets of Elliott Wave Theory and the importance of Fibonacci numbers.
Elliott wave theory suggests that prices exhibit a pattern of five waves in the direction of a trend and three waves counter to the trend. Technical analysts who employ Elliott wave theory frequently use ratios of the numbers in the Fibonacci sequence to estimate price targets and identify potential support and resistance levels.
