CFA 12: Technical Analysis

Question 1

relative strength analysis

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Answer 1

Used to compare the perrormance of a particular asset, such as a common stock, with that of some benchmark, like the S&P 500 or the performance of another security.

Question 2

technical analysis

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Answer 2

A form of security analysis that uses price and volume data, which is often graphically displayed, in decision making.

Prices are the result of the interaction of supply and demand in real time in freely traded markets; supply and demand determine prices.

Changes in supply and demand cause changes in prices.

Prices can be projected with charts and other technical tools.

Question 3

trend

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Answer 3

The concept of a trend is perhaps the most important aspect of technical analysis. Trend analysis is based on the observation that market participants tend to act in herds and that trends tend to stay in place for some time. A security can be considered to be in an upward trend, a downward trend, a sideways trend, or no apparent trend.

Question 4

retracement

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Answer 4

A reversal in the movement of the security’s price.

Question 5

support

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Answer 5

A low price range in which buying activity is sufficient to stop the decline in price.

Question 6

resistance

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Answer 6

A price range in which selling is sufficient to stop the rise in price.

Question 7

change in polarity principle

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Answer 7

Once a support level is breached, it becomes a resistance level. The same holds true for resistance levels; once breached, they become support levels.

Question 8

reversal patterns

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Answer 8

A type of pattern used in technical analysis to predict the end of a trend and a change in direction of the security’s price.

Question 9

continuation patterns

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Answer 9

A type of pattern used in technical analysis to predict the resumption of a market trend that was in place prior to the formation of a pattern.

Question 10

head and shoulders pattern

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Answer 10

In technical analysis, a reversal pattern that is formed in three parts: a left shoulder, head, and right shoulder; used to predict a change from an uptrend to a downtrend.

Question 11

divergence

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Answer 11

In technical analysis, a term that describes the case when an indicator moves differently from the security being analyzed.

Question 12

double top

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Answer 12

A reversal pattern that is formed when an uptrend reverses twice at roughly the same high price level; used to predict a change from an uptrend to a downtrend.

Question 13

double bottom

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Answer 13

A reversal pattern that is formed when the price reaches a low, rebounds, and then sells off back to the first low level; used to predict a change from a downtrend to an uptrend.

Question 14

triple top

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Answer 14

A reversal pattern that is formed when the price forms three peaks at roughly the same price level; used to predict a change from an uptrend to a downtrend.

Question 15

triple bottom

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Answer 15

A reversal pattern that is formed whn the price forms three troughs at roughly the same price level; used to predict a change from a downtrend to an uptrend.

Question 16

triangle patterns

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Answer 16

A contiunation chart pattern that forms as the range between high and low prices narrow, visually forming a triangle.

Question 17

flags

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Answer 17

A technical analysis continuation pattern formed by parallel trendlines, typically over a short period.

Question 18

pennants

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Answer 18

A technical analysis continuation pattern formed by trendlines that converge to form a triangle, typically over a short period.

Question 19

moving average

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Answer 19

The average of the closing price of a security over a specified number of periods. Moving averages smooth out short-term price fluctuations, giving the technician a clearer image of market trend.

Technicians commonly use a simple moving average, which weights each price equally in the calculation of the average price.

Some technicians prefer to use an exponential moving average (also called an exponentially smoothed moving average), which gives the greatest weight to recent prices while giving exponentially less weight to older prices.

Question 20

golden cross

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Answer 20

When a short-term moving average crosses from underneath a longer-term average; this is a bullish movement.

Question 21

dead cross

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Answer 21

When a short-term moving average crosses from above a longer-term moving average; this is considered a bearish movement.

Question 22

Bollinger Bands

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Answer 22

Consist of a moving average plus a higher line representing the moving average plus a set number of standard deviations from average price (for the same number of periods as used to calculate the moving average) and a lower line that is a moving average minus the same number of standard deviations.

The more volatile the security being analyzed becomes, the wider the range becomes between the two outer lines or bands.

Question 23

momentum oscillators

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Answer 23

Momentum oscillators are intended to alleviate the difficulty of discerning changes in market sentiment that are out of the ordinary that comes with using indicators overlaid on a price chart.

They are constructed from price data, but they are calculated so that they either oscillate between a high and low (typically 0 and 100) or oscillate around a number (such as 0 or 100). Because of this construction, extreme highs or lows are easily discernible.

Technicians look for convergence or divergence between oscillators and price. Convergence is when the oscillator moves in the same manner as the security being analyzed, and divergence is when the oscillator moves differently from the security.

Momentum oscillators should be used in conjunction with an understanding of the existing market (price) trend. Oscillators alert a trader to overbought and oversold conditions.

Question 24

convergence

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Answer 24

In technical analysis, a term that descibes the case when an indicator moves in the same manner as the security being analyzed.

Question 25

overbought

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Answer 25

A market condition in which market sentiment is thought to be unsustainably bullish.

Question 26

oversold

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Answer 26

A market condition in which market sentiment is thought to be unsustainably bearish.

Question 27

moving-average convergence/divergence oscillator (MACD)

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Answer 27

The MACD is the difference between a short-term and a long-term moving average of the security’s price. The MACD is constructed by calculating two line, the MACD line and the signal line:

MACD line: difference between two exponentially smoothed moving averages, generally 12 and 26 days.

Signal line: exponentially smoothed average of MACD line, generally 9 days.

The indicator oscillates around zero and has no upper or lower limit. Rather than using a set overbought-oversold range for MACD, the analyst compares the current level with the historical performance of the oscillator for a particular security to determine when a security is out of its normal sentiment range.

MACD is used in technical analysis in three ways. The first is to note crossovers of the MACD line and the signal line, as discussed for moving averages and the stochastic oscillator. Crossovers of the two lines may indicate a change in trend.

The second is to look for times when the MACD is outside its normal range for a given security.

The third is to use trend lines on the MACD itself. When the MACD is trending in the same direction as price, this pattern is convergence, and when the two are trending in opposite directions, the pattern is divergence.

Question 28

put/call ratio

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Answer 28

The volume of put options traded divided by the volume of call options traded for a particular financial instrument.

Question 29

CBOE Volatility Index (VIX)

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Answer 29

A measure of near-term market volatility calculated by the Chicago Board Options Exchange.

Question 30

TRIN (Arms Index)

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Answer 30

“Short-term trading index”. This indicator is applied to abroad market to measure the relative extent to which money is moving into or out of rising and declining stocks.

The index is a ratio of two ratios:

Number of advancing issues / number of declining issues
OVER
volume of advancing issues/ volume of declining issues

When this index is near 1.0, the market is in balance; that is, as much money is moving into rising stocks as into declining stocks. A value above 1.0 means that there is more volume in declining stocks; a value below 1.0 means that most trading activity is in rising stocks.

Question 31

Kondratieff Wave (K Wave)

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Answer 31

A 54 year long economic cycle postulated by Nikolai Kondratieff

Question 32

Elliott Wave Theory

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Answer 32

A technical analysis theory that claims that the market follows regular, repeated waves or cycles.

Question 33

intermarket analysis

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Answer 33

A field within technical analysis that combines analysis of major categories of securitiees - namely, equities, bonds, currencies, and commodities - to identify market trends and possible inflections in a trend.