Chapter 6: Technical Analysis

Question 1

5 Uses for share price indices

Answer 1

• To forecast the economic cycle
• Helps with timing purchases and sales
• Evaluate the performance of a portfolio
• To quantify risk
• Determining speculative activities

Question 2

Technical analysis

Answer 2

The study of all events in the market such as movements in the share prices, indices and volumes, in an attempt to determine trends and then to make predictions and deductions from the trends.

Question 3

Fundamental analysts

Answer 3

Analyse the financial statements of a company and try to determine from this a realistic value for the shares.
This value is compared to the present market price to see whether the share is under- or overvalued and then an investment decision is made.

Question 4

Technical analysts

Answer 4

Tend to study historical and present market data such as prices and volumes traded, and determine according to these how to act.

Question 5

4 Basic assumptions of technical analysis

Answer 5

• Market value of goods & services are determined by supply and demand exclusively.
• Supply & demand is influenced by various factors, both rational and irrational.
• Smaller fluctuations excluded, the price of individual securities and the market in its totality tend to form certain trends and these trends will continue for a reasonably long time.
• A trend will change due to a change in the relationship between supply and demand.

Question 6

Dow theory: 3 types of trends

Answer 6

• Primary trend
• Secondary trend
• Short-term fluctuations

Question 7

Primary trend

Answer 7

The long term trend.

Question 8

Secondary trend

Answer 8

A period in which the price will move in the opposite direction to the primary trend.
Periods of “profit taking”

Question 9

2 General guidelines that will confirm a secondary trend

Answer 9

• Price movement in the opposite direction is at least 3 weeks long.
• At least one-third of the previous price movement must be cancelled out.

Question 10

2 Purchase signals with a moving day average

Answer 10

• If the 200-day average flattens or starts rising after a decline and the daily share price breaks through the average line in its upward movement.
• If the share price is above the 200-day line, and starts to drop towards the average line but does not cross it, and then starts rising again.

Question 11

2 Sell signals with a moving day average

Answer 11

• If the 200-day average flattens or starts declining after a rise and the daily share price breaks through the average line in its downward movement.
• If the share price is below the 200-day line and starts to rise towards the average line but does not cross it and then starts dropping again.