Chapter 6

Question 1

What are the Basics of Technical Analysis?

Answer 1

Technical Analysis study statistical trends based on trading activity to try and anticipate future price movements for economic gain.

1. All market influences are fully reflective in a share price
2. Prices tend to move in trends over a relatively long period of time
3. The future can be found in the past. While history does not repeat itself exactly, a technical analyst believes a lot can be learned from the past.

Question 2

What are the four primary disciplines of Technical Anyalysis?

Answer 2

1. Chart analysis (most commonly used)
2. Statistical analysis
3. Sentiment analysis
4. Intermarket analysis

Question 3

What are some examples of Price Charts?

Answer 3

1. Bar charts (defined as OHLC, open-high-low-close)
2. Line charts (memory aid, one line one value)
3. Candlestick charts

Question 4

What are some examples of Chart Patterns?

Answer 4

1. Trendlines
2. Support (demand exceeds supply) and resistant levels (supply exceeds demand)
3. Reversal formations
4. Head and shoulders (H&S) formation
   head-and-shoulders top formation: sell signal
   head-and-shoulders bottom formation: buy signal
5. Double top and double bottom H&S formation
6. Key reversal
7. Continuation patterns
8. Triangles
   Symmetrical triangle
   Ascending triangle
   Descending triangle

Question 5

Answer 5

Head-and-Shoulders (H&S) Formation
top formation: sell signal
bottom formation: buy signal

Question 6

What is Statistical Analysis?

Answer 6

Statistical Analysis is more objective than chart analysis because it leaves less room for differences of opinion since everyone is looking at the same data and using a uniform method to calculate the indicator.

Question 7

What are a few Trend-Following indicators?

Answer 7

1. Moving averages
2. Price bands (think ranges)

Question 8

What are two Moving averages?

Answer 8

1. Simple moving average - gives equal weight to each session’s price during the period.
2. Weighted (exponential) moving average - give more weight to recent prices.

Question 9

What are the three most popular momentum indicators?

Answer 9

1. Moving average convergence divergence (MACD)
2. Stochastic indicator
3. Relative strength index (RSI)

Question 10

What does momentum indicators involve and name two of them?

Answer 10

They involve oscillators, that move back and forth at a constant speed.

1. One that floats within fixed values.
2. One that floats but does not remain within fixed values.

Question 11

A momentum oscillator can be used in three main way, name them:

Answer 11

1. To provide buy and sell signals.
2. To indicate when a stock is overbought or oversold.
3. It can be used in divergence analysis.

Question 12

What does Diverge and Converge mean?

Answer 12

Diverge - deviate, stray wander
Converge - merge, combine, concur

Question 13

Define ‘outside day’?

Answer 13

If the price closes lower than the previous day’s low

Question 14

Define Public Short Ratio (PSR)

Question 15

What is the most common continuation pattern?

Answer 15

Triangles

Question 16

What is a Stochastic indicator

Answer 16

Assesses the quality of a market move or direction. When a stock trends higher, the daily close tends to be close to the highest price during that day. When a stock trends lower, the daily close tends to be close to the lowest price during that day.

A shorter time period will be more sensitive but will also capture less significant market moves.

To capture more significant moves, a longer-term period such as 14 to 21 days would be more appropriate.

Question 17

Define support level, resistance level and whipsawed

Answer 17

Support level: is a price level at which investors start sensing value and are therefore willing to buy, when prices fall to a certain point, demand generally exceeds supply.

Resistance level: supply exceeds demand for the stock, preventing the stock price from heading any higher.

Whipsawed: An investor could see that the price has broken through the support or resistance level and take an action, thinking that the market will continue to move in that direction only to have it reverse and go the other way.

Question 18

PSR = public short positions/total short positions

Question 19

Define Relative strength index (RSI)

Answer 19

The relative strength index (RSI) can be used to indicate overbought and oversold as it measures relative momentum by comparing the strength of price gains on days when the stock advances to the strength of price losses when the stock declines. While the RSI is generally calculated based on the past 14 days of price action, any number of days can be used depending on how sensitive an indicator an analysist wants.

Question 20

Define Candlestick calendar

Answer 20

Are similar to bar charts in that they represent the open, high, low and closing prices. The key difference is that candlestick charts have a ‘real body’, which is a box for which the colour in the box (black or shaded in versus blank or white) is a visual, which allows for interpretation the chart.

Question 21

The relative strength index (RSI) can be used to indicate overbought and oversold as it measures relative momentum by comparing the strength of price gains on days when the stock advances to the strength of price losses when the stock declines. While the RSI is generally calculated based on the past 14 days of price action, any number of days can be used depending on how sensitive an indicator an analysist wants.

If this RSI is below 30, the shares are generally?

Answer 21

said to be generally over sold, which means they may be reaching the bottom of the price range (a buy signal).

Question 22

The relative strength index (RSI) can be used to indicate overbought and oversold as it measures relative momentum by comparing the strength of price gains on days when the stock advances to the strength of price losses when the stock declines. While the RSI is generally calculated based on the past 14 days of price action, any number of days can be used depending on how sensitive an indicator an analysist wants.

If this RSI is above 70, the shares are generally?

Answer 22

said to be generally overbought, which means they may be reaching the top of the price range (a sell signal).

Question 23

The relative strength index (RSI) can be used to indicate overbought and oversold as it measures relative momentum by comparing the strength of price gains on days when the stock advances to the strength of price losses when the stock declines. While the RSI is generally calculated based on the past 14 days of price action, any number of days can be used depending on how sensitive an indicator an analysist wants.

If this RSI is above or below 50 for an extended period of time?

Answer 23

the stock is trending in that direction.

Question 24

The relative strength index (RSI) can be used to indicate overbought and oversold as it measures relative momentum by comparing the strength of price gains on days when the stock advances to the strength of price losses when the stock declines. While the RSI is generally calculated based on the past 14 days of price action, any number of days can be used depending on how sensitive an indicator an analysist wants.

If this RSI is above 80?

Answer 24

is considered to be a very strong reading.

Question 25

Define the following:

Moving averages
Stochastic indicators
Relative strength index (RSI)
Trend line

Answer 25

Can isolate trends by toning down sharp fluctuations.
Assesses quality of market moves.
Measures momentum.
Can help identify a trend but does not assess its quality