Chapter 8 - Technical Analysis Flashcards
Given that fundamental analysis can be thought of as the study of a market’s supply an demand factors, what can technical analysis can be considered as?
The study of the cumulative effects of these factors on current and past market activity.
What are the 3 assumptions that technical analysis is 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 the primary task of technical analysts?
Identify a trend and carry positions in this trend until it reverses.
How does technical analysis work with fundamental analysis?
Technical analysis is essentially an indirect study of fundamentals by studying the effects of changing fundamentals. Technical analysts assume that fundamental analysts have done their job and all known market influences are already reflected in prices. They believe all that is left to do is study market action and identify trends.
What are the 4 disciplines of technical analysis? Which is the most commonly used?
- Chart analysis most commonly used
- Statistical analysis
- Sentiment analysis
- Intermarket analysis
What are the types of price charts?
- Bar charts
- Line charts
- Candlestick charts
What is a bar chart?
Also known as an open-high-low-chart.
Plots price on the y axis and time on the x axis. Activity in each period (hour, day, week, month, etc.) is represented on a vertical bar, with the top representing the highest price and the bottom representing the lowest price. Open price is represented by a short horizontal line to the left, close by a line to the right.
How do line charts work? What are they often used for?
They track a single value only, usually closing price. Often used to chart statistical indicators, such as moving averages and oscillators.
How do candlestick charts differ from bar charts?
Each bar has a real body. If the closing price is higher than the opening price, the body is white/empty. If the closing price is lower, the body is black or filled in. This creates a visual for how price is moving over time.
Why is a third point needed even though a trendline can be drawn by connecting just two points?
The third point is needed to confirm that the trend is valid.
Why would a price decline to, or near, an up trendline present as a potential buying opportunity?
Once a trendline assumes a certain slope, the slope tends to persist.
What is it called if a stock trades below an up trendline or above a down trendline? What might this signal?
This is referred to as a break or violation of the trendline. It may signal an end to the trend.
When might a break in a trendline NOT signal the end of a trend?
If a violation is to a trendline that has been intact for a short period only, is steep, and has only been tested a few times, it may only indicate a slowing or pausing of the trend.
As well, the violation of a trendline due to the passage of time is generally seen as less significant than one caused primarily by a significant price move.
What factors would make a beak in an up trendline more significant?
If accompanied by a significant increase in volume and a change in a moving average of the price.
What are the most common support and resistance levels?
The highs and lows of trading ranges. These are known as horizontal support and horizontal resistance levels.
What is the “support level”?
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. Prices send to rise from support levels.
What is the resistance level?
The price at which investors believe a stock is fully valued or overvalued. Perceived return potential is limited and many of the stock’s holders are willing to sell. Prospective buyers are unwilling to buy. Prices tend to fall as supply overwhelms demand.
What does the term ‘whipsawed’ refer to?
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.
What are reversal formations?
Not the same thing as a trendline violation. Reversal formations are price or chart patterns that help confirm whether a trend reversal has taken place.
What are continuation formations and what is the purpose of them?
Unlike reversal formations, these can help identify if a previous trend (which has ended) is likely to resume after a period of consolidation.
What is the difference between a head-and-shoulders top and bottom/inverse head-and-shoulders?
H&S top formation appears at the end of a bull market, while an inverse H&S appears at the end of a bear market.
What is the neckline in an H&S formation?
A trendline that can be drawn to connect the low that formed at the end of the left shoulder with the low that followed the formation of the head in the H&S formation. (Or the highs in the case of an inverse H&S).
When is the formation of a H&S formation confirmed?
Not until the neckline is violated.
What is a key reversal?
Occurs after a long move either up or down has taken place, typically following a period of sharp price movements in the direction of the prevailing trend. At the end of the day of a key reversal, the price will have closed lower (uptrend) or higher (downtrend) than the previous day’s close.
What is an ‘outside day’ in a key reversal formation?
If during a key reversal, prices close lower than the previous day’s low (uptrend) or higher than the previous day’s high (downtrend). This shows that the reversal has even more significance.
What does a key reversal on high volume indicate?
Reasonable assurance that the preceding trend has come to an end. Can be further confirmed if/when a trendline is violated.
What is a double bottom or double top formation?
Similar to H&S, but appears like a capital M or W. This is another trend reversal formation.
When are double top/bottom reversal formations generally considered more significant?
The longer the time between the tops or bottoms. When they occur on a daily chart, they generally take about two months or less to develop. Weekly or monthly double tops/bottoms take longer to develop and have more significance.
