Chapter 6

Question 1

What are the three assumptions of technical analysis

Answer 1

1. All influences on market action are automatically accounted for or discounted in price activity
2. Prices move in trends that tend to persist for relatively long periods of time
3. The future can be found in the past

Question 2

What is the main difference between bar charts and candlestick charts?

Answer 2

• the candlestick for each period has a real body- a box that visually represents the difference bet ween a periods opening and closing prices
• when the closing price is lower than the opening price, the real body is filled in

Question 3

Describe support level

Answer 3

• the price at which the majority of investors sense value and are willing to buy more than the stock’s holders are willing to sell
• as demand outstrips supply, prices tend to rise from support levels

Question 4

Defined “whipsawed”

Answer 4

Getting whipsawed means taking a certain position in anticipation of the market moving in a certain direction, only to have it reverse and go in the opposite direction

Question 5

When does a head and shoulders top appear?

Answer 5

End of a bull market

Question 6

When does a head and shoulders bottom appear?

Answer 6

End of a bear market

Question 7

Describe key reversal

Answer 7

• occurs after a long move either up or down has taken place

- typically follows several days or even weeks of sharp price movements in the direction of a prevailing trend

Question 8

Describe Bollinger Bands

Answer 8

-band widens as price volatility increases and narrows as it decreases

Question 9

Describe moving average envelopes

Answer 9

-plotted at a fixed percentage above or below a moving average

Question 10

Describe the moving average convergence-divergence (MACD) indicator

Answer 10

• not bound between two fixed values
• equal to the difference between a ST and LT exponential moving average (EMA)
• often used to measure the difference between a 12- and a 26- period EMA
• used in crossover analysis and divergence analysis

Question 11

Describe a stochastic indicator

Answer 11

• indicates whether the market is closing near its highs or lows
• bound between two fixed values
• standard period is 5 days
• used to generate buy and sell signals based on crossovers, identify overbought and oversold levels, and conduct divergence analysis

Question 12

Describe relative strength index (RSI)

Answer 12

• bound between 2 fixed values
• measures momentum by comparing the relative strength of price gains on days when a stock closes up to the strength of price declines when a stock closes down
• calculated by looking at the last 14 days of price action
• indicates overbought (>70) and oversold levels (<30)

Question 13

When a market considered to be trending according to RSI?

Answer 13

When a market remains above or below 50 for extended periods of time

Question 14

Describe put/call ratio

Answer 14

• compares the number of put options traded during a trading session with the number of call options
• if the ratio is rising, it suggests bearish market sentiment
• since put/call ratio is a contrarian indicator, bearish market sentiment is considered a bullish indicator

Question 15

Describe the pubic short ratio

Answer 15

• divides the total number of public short sales by the total number of short sales
• when ratio is high, it indicates that public investors are more pessimistic about future market gains relative to member firms