Chapter 6 - Technical Analysis Flashcards
What Three assumptions is Technical Analysis Based on?
- All influences on market action are automatically accounted for or discounted in price activity.
- Prices move in trends that tend to persist for relatively long periods of time.
- The future can be found in the past.
What is Chart Analysis?
Chart analysis, the most commonly used of the four, is the study of a security’s price movements over a specific period of time, which technical analysts believe can be used to forecast where prices are headed.
What are three Types of Charts?
- Bar Chart
- The bar chart plots price on the vertical axis and time on the horizontal axis. The activity in each period (hour, day, week, month, etc.) is represented on a vertical bar, with the top of the bar representing the highest price for that period and the bottom representing the lowest price. - Line Chart
- Line charts track a single value only, usually the closing price, rather than the four values contained in a standard bar chart. Since most technicians want to know all four pieces of information, line charts are rarely used to track primary price data. However, they are used for statistical indicators, ex. Moving averages, oscillators. - Candlestick charts use one of the oldest known charting techniques, which originated in Japan in the early 17th century. Like bar charts, candlestick charts record the opening, high, low, and closing price for each period. The main difference between the two is that the candlestick for each period has a real body—that is, a box that visually represents the difference between a period’s opening and closing prices.
What are Trendlines?
One of the principles of technical analysis is that prices move in long-term, intermediate, or short-term trends. A Trendline is used to determine trends.
Cannot be drawn by connecting two points, needs a third to confirm
Up-Trendline
- It is a line connecting a series of ascending lows
Down-Trendline
- A line connecting a series of descending highs
What is a Break in a trendline?
If a stock trades below an up trendline or above a down trendline—a situation referred to as a break (or violation) of the trendline it may signal an end to the trend.
The violation of a longterm trendline is a more likely signal of the end of a trend.
The violation of the trendline caused by the passage of time is generally thought to be less significant than the violation caused primarily by a significant price move.
What are Support and Resistance Levels?
A support level is the price at which the majority of investors sense value and are willing to buy more than the stock’s holders (or short sellers) are willing to sell. Prices tend to rise.
A resistance level is the price at which investors believe the stock is fully valued or possibly even overvalued. At this point, perceived return potential is limited and many of the stock’s holders (or short sellers) are willing to sell. Prices tend to fall.
What are Trend Reversals?
Trendline violations are not the same thing as trend reversals. A trendline can be violated without the trend reversing. In most cases, the violation indicates that the previous trend has come to an end. A period of sideways trading often follows. This may lead to a reversal of the previous trend or to a new trend in the same direction as the
previous one.
What is a Reversal Formation?
Reversal formations are price or chart patterns that help confirm whether a trend reversal has taken place.
Can take weeks of even months to develop.
What is a Continuation Pattern?
Continuation patterns, on the other hand, can help identify if a previous trend (which has ended) is likely to resume after a period of consolidation
What is a Head-and-Shoulders Formation?
The head-and-shoulders (H&S) formation, gets its name from its similarity to a human head and shoulders silhouette.
When this formation appears at the end of a bull market, it is called a head-and-shoulders (H&S) top.
When it takes place at the end of a bear market, it is known as a head-and-shoulders (H&S) bottom or an inverse head and shoulders.
A decisive break of the neckline indicates that a trend reversal has probably taken place.
After the break, the projected move would take the price below the neckline by an amount approximately equal to the vertical distance between the neckline and the peak of the head.
What is a Key Reversal Trend?
A key reversal occurs after a long move either up or down has taken place. It typically follows several days, or even weeks, of sharp price movements in the direction of a prevailing trend.
What Double Top and Double Bottom Formations
Double top and double bottom formations are almost as common as head-and-shoulders formations. These formations resemble the capital letter M (double top) and W (double bottom).
What is a Symmetrical Triangle Trend
A symmetrical triangle usually indicates a continuation, but may occasionally indicate a reversal. In a symmetrical triangle, the support and resistance lines are equal in length and slope, although the slope cannot be horizontal (technically, the slope of the resistance line is the negative of the slope of the support line).
Volatility is typically very low.
No clear methods for distinguishing whether a symmetrical triangle represents a reversal or a continuation, so you must pay close attention to volume.
What is an Ascending Triangle?
An ascending triangle is a continuation pattern and is a bullish pattern that has a horizontal resistance line and a positively sloped trendline acting as support.
It normally indicates a reversal in a bear market and a continuation in a bull market.
What is a Descending Triangle?
A descending triangle is the opposite of an ascending triangle. It consists of a horizontal support line and a negatively sloped trendline acting as resistance. A descending triangle always indicates a reversal in a bull market and a continuation in a bear market.
What are Moving Averages? Describe the two mostly commonly used.
Moving averages are the most widely used statistical indicator. Moving averages differ by type—simple, weighted, or exponential—and by the number of days to be averaged.
A Simple Moving Average is an arithmetic average of closing prices over the past “n” days. The price observations are merely added up and divided by the total number of observations
The Weighted Moving verage and exponential moving average give more weight to recent prices than they do to older ones.
What are Price Bands
While moving averages can be used to identify support and resistance levels, price bands, including Bollinger Bands and moving average envelopes, take this concept one step further.
Bollinger Bands
- Given the assumption that prices are approximately normally
distributed, a two-standard deviation band should capture approximately 95% of the price action.
- The band Widens as volatility increases.
Moving Average Envelops
- Plotted at a fixed percentage above or below a moving average. +/- 2%
What are Momentum Indicators?
While trends describe the general direction of prices, momentum measures the degree to which trends are accelerating or decelerating.
While a stock may be in an uptrend, the uptrend may be slowing, indicating that it may be about to end.
What is the Moving Average Convergence-Divergence (MACD)
Not bound between two fixed variables.
It is equal to the difference between a short-term and longer-term exponential moving average (EMA).
The MACD indicator is typically used in two ways: crossovers and divergences. In crossover analysis, buy signals are generated whenever the MACD line rises above the signal line (the EMA of the MACD line) from below, and sell signals are given whenever the MACD line falls below the signal line from above.
What is the Stochastic Indicator?
The stochastic indicator is a good tool for assessing the quality of market moves.
Bounds by fixed limits
The stochastic indicates whether the market is closing near its highs or lows.
