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BusMan 142 > Component 4: technical analysis > Flashcards

Component 4: technical analysis Flashcards

1
Q

What is the main focus of technical analysis?

A

echnical analysis focuses on studying market events (such as share prices, indices, and volumes) to identify trends and make predictions about future price movements.

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2
Q

How does technical analysis differ from fundamental analysis?

A

Technical analysts study historical market data (prices and volumes), while fundamental analysts focus on a company’s financial statements to determine its intrinsic value.

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3
Q

What do technical analysts believe about share prices?

A

They believe that share prices reflect all available information, making them the best indicator of future market movements.

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4
Q

What is the underlying philosophy of technical analysis?

A

The philosophy is that past trends tend to repeat themselves, and identifying these trends early can help make informed buy or sell decisions.

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5
Q

What are the basic assumptions of technical analysis according to Robert A Levy?

A
  1. Market value is determined by supply and demand.
  2. Supply and demand are influenced by both rational and irrational factors.
  3. Prices tend to form trends that continue for a long period.
  4. Trends change when supply and demand change.
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6
Q

Why do prices tend to move in a certain direction for a long time?

A

Not all market participants receive new information at the same time. Insiders and institutional investors react first, followed by the general public.

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7
Q

What is a share price index?

A

A share price index is a tool that tracks the movement of share prices to indicate the general direction of the market and the economy.

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8
Q

Who developed the first share price index and why?

A

Charles H Dow developed it in the 1890s to provide a simple way to gauge the general business climate by observing share price movements.

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9
Q

What are the main uses of share price indexes?

A
  1. To forecast the economic cycle.
  2. To time purchases and sales.
  3. To evaluate portfolio performance.
  4. To quantify risk using Beta-analysis.
  5. To determine if market movements are speculative.
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10
Q

How can share price indexes help forecast the economic cycle?

A

They act as a leading indicator, with changes in share prices often predicting economic upswings or downturns 6 months to 2 years in advance.

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11
Q

How can share price indexes assist with timing purchases and sales?

A

By studying market indices, investors can identify when the market is relatively high or low, helping them decide the best times to buy or sell.

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12
Q

How can share price indexes be used to evaluate portfolio performance?

A

Comparing portfolio growth to the growth of a market index helps investors determine if their portfolio is performing well or poorly.

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13
Q

How does Beta-analysis help in investment decisions?

A

Beta-analysis quantifies the sensitivity of a share’s price relative to the market, with higher Beta values indicating higher risk.

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14
Q

What can share price indexes reveal about speculative activities?

A

By analyzing sharp market movements alongside volume and value of shares traded, one can determine if changes are due to speculation or shifts in investor expectations.

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15
Q

What are the three basic techniques for constructing a share price index?

A

Price weighting, equal weighting, and market capitalization.

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16
Q

How is a price-weighted share price index constructed?

A

By adding the share prices of selected companies. The index starts at a base value, such as 100, and changes as the total share prices change over time.

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17
Q

What is the major disadvantage of the price-weighted technique?

A

High-priced shares carry more weight in the index, which can distort the overall result.

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18
Q

What is the formula for calculating a price-weighted index?

A

The sum of the share prices on the base date is set as the initial index value (e.g., 100). The total share price on a future date is then divided by the base total to calculate the new index value.

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19
Q

How does equal weighting eliminate the disadvantages of price weighting?

A

Each share is assigned an equal weight so that their contribution to the index is the same, regardless of the share price.

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20
Q

How do you calculate the weight of each share in an equal-weighted index?

A

The weight is determined by how many shares can be bought with a fixed amount (e.g., R1,000) at the base date price.

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21
Q

What happens to the index value in an equal-weighted index as prices change?

A

The market price on a future date is multiplied by the same weight as the base date, and the total portfolio value is compared to the base value.

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22
Q

What is market capitalization, and how is it used to construct an index?

A

Market capitalization is the number of issued shares multiplied by the market price of the shares. An index based on market capitalization uses the total market value of the companies.

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23
Q

Why is market capitalization considered the most representative technique for constructing a share price index?

A

It reflects the actual size and value of companies, giving larger companies more weight and better representing the overall market.

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24
Q

What is the FTSE/JSE Africa Index Series?

A

It is a set of indexes representing the performance of South African companies, replacing the JSE Actuaries Index in 2002. It is predominantly calculated using market capitalization.

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25
Q

How does the index value change in a market capitalization-weighted index when prices increase?

A

The index value increases as the total market capitalization of the selected companies rises.

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26
Q

What are the three types of price movements according to Dow Theory?

A

Primary trend (long-term), secondary trend (medium-term), and short-term fluctuations.

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27
Q

What defines a primary trend in Dow Theory?

A

A long-term price movement where a bull market has rising highs and troughs, and a bear market has declining highs and troughs.

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28
Q

What is the objective of a long-term investor according to Dow Theory?

A

To buy at the beginning of a bull market and sell at its peak.

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29
Q

What defines a secondary trend in Dow Theory?

A

A medium-term trend that moves against the primary trend, often referred to as profit-taking or a breather.

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30
Q

How long does a secondary trend typically last?

A

Between one to three months, usually reversing one-third to two-thirds of the previous primary trend movement.

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31
Q

What are the guidelines for confirming a secondary trend?

A

The price movement must last at least three weeks, and one-third of the previous price movement must be canceled out.

32
Q

What is the significance of short-term fluctuations in Dow Theory?

A

They are daily price movements that do not meet the criteria for secondary trends, but eventually contribute to longer-term trends.

33
Q

What is a bar chart in technical analysis?

A

A chart where vertical lines represent price movements during a specific time period, showing the highest, lowest, opening, and closing prices.

34
Q

What additional feature is often included in bar charts?

A

Volume of shares traded, usually represented by bars at the bottom of the chart.

35
Q

What formations can be identified on a bar chart?

A

Flag, triangle, wedge, and head-and-shoulders formations.

36
Q

What is a point-and-figure chart?

A

A chart that tracks price trends without a time axis, using ‘X’ for price increases and ‘O’ for price decreases.

37
Q

What is the primary advantage of a point-and-figure chart?

A

It reveals long-term price movements and consolidations, useful for identifying trends over extended periods.

38
Q

How does the scale affect a point-and-figure chart?

A

A smaller scale (e.g., 1c per block) is more sensitive to price changes than a larger scale (e.g., 5c per block).

39
Q

What does the point-indication in a point-and-figure chart represent?

A

The number of cells (points) the price must reverse before a new trend is indicated on the chart.

40
Q

How is a three-point reversal point-and-figure chart constructed?

A

The price must move by at least 3 points in the opposite direction before the reversal is plotted on the chart.

41
Q

What is a Double Top Formation in a Point-and-Figure chart?

A

It’s when the share price rises to a certain level, drops, then rises again to the same level. A breakthrough of this level signals a buy.

42
Q

What does a Quadruple Top Formation indicate?

A

It implies that the price is testing a specific level for the fourth time, and a breakthrough now gives a much stronger buy signal than a double top.

43
Q

What is a Double Bottom Formation?

A

It occurs when the price of a share drops to a certain level, rises, then drops to the same level again. A breakthrough downwards indicates a sell signal.

44
Q

Describe a Bullish Signal Formation.

A

This formation occurs when a falling price trend is reversed and the price breaks upwards. It shows consecutive higher highs and higher lows.

45
Q

Describe a Bearish Signal Formation.

A

This formation happens when a rising price trend is reversed, and the price falls through the bottom. It has consecutive lower highs and lower lows.

46
Q

What is a Bullish Symmetrical Triangle Formation?

A

It forms during a rising price trend where the price creates a triangular pattern and continues upwards, with higher peaks and higher troughs.

47
Q

What is a Bearish Symmetrical Triangle Formation?

A

It forms during a falling price trend where the price creates a triangular pattern and continues downwards, with lower peaks and lower troughs.

48
Q

What are Trend Lines?

A

These are lines plotted to show the general direction of a stock’s price movement. They help indicate whether the market is in a bull, bear, or lateral phase.

49
Q

What is a Support Line in technical analysis?

A

It forms at the bottom of a price formation. If the price falls through this line, it’s a sell signal as the price is expected to stabilize at a lower level.

50
Q

What is a Resistance Line in technical analysis?

A

It forms at the top of a price formation. A price breakthrough of this line signals a buy, as the price is expected to stabilize at a higher level.

51
Q

What is a Moving Average?

A

A moving average smooths out price fluctuations by calculating the average of a stock’s price over a set period, such as 200 days, providing a clearer picture of the long-term trend.

52
Q

How is a 200-day Moving Average calculated?

A

Add the stock prices of the last 200 days, divide the total by 200, and repeat by dropping the oldest price and adding the newest day’s price.

53
Q

How do you calculate a 5-day Moving Average?

A

Add the stock prices for the last 5 days, divide the total by 5, and update by dropping the oldest price and adding the newest price each day.

54
Q

What is the purpose of a Moving Average?

A

It smooths out volatile price movements to reveal the underlying long-term trend and can indicate whether a trend has reversed.

55
Q

When is a 200-day Moving Average used?

A

It is commonly used by technical analysts to identify long-term trends in stock prices, as it provides a smoother curve by neutralizing short-term fluctuations.

56
Q

What is a Buy Signal based on the 200-day Moving Average?

A

A buy signal occurs when:

  • The 200-day average flattens or starts rising after a decline, and the daily share price crosses above it.
  • The price approaches but does not cross below the 200-day average and then rises again.
57
Q

What is a Sell Signal based on the 200-day Moving Average?

A

A sell signal occurs when:

  • The 200-day average flattens or starts declining after a rise, and the price drops below it.
  • The price approaches but does not cross above the 200-day average and then drops again.
58
Q

How does the 50-day Moving Average interact with the 200-day Moving Average?

A

When the 50-day moving average crosses the 200-day line from below, it’s a strong buy signal. When it crosses from above, it’s a sell signal.

59
Q

What does it mean when the 50-day Moving Average moves far above the 200-day line?

A

It indicates the stock is “overbought,” suggesting it might be overvalued and could fall soon.

60
Q

What does it mean when the 50-day Moving Average moves far below the 200-day line?

A

It suggests the stock is “oversold,” indicating it might be undervalued and could rise soon.

61
Q

How do you plot a Moving Average graph?

A

Plot the calculated moving averages along with the absolute share prices. The moving average line will be smoother, showing the trend more clearly.

62
Q

What is the significance of the 50-day and 200-day Moving Average crossing?

A

A crossover indicates a change in trend:

  • If the 50-day crosses above the 200-day, it’s a bullish signal (buy).
  • If the 50-day crosses below the 200-day, it’s a bearish signal (sell).
63
Q

What is market breadth?

A

Market breadth is a technical indicator used to measure the direction of the overall market by analyzing the number of advancing and declining companies each day.

64
Q

How does the Market Breadth Index address the issue of larger companies influencing market indexes?

A

It assigns “one company, one vote,” giving equal weight to all companies regardless of their market capitalization.

65
Q

How is the Net Change in Market Breadth calculated?

A

Net Change = Today’s advancing shares – Today’s declining shares.

66
Q

What is the Cumulative Change in the Market Breadth Index?

A

Cumulative Change = Yesterday’s cumulative change (AD-Line value) + Today’s net change.

67
Q

What does it indicate if the AD-Line moves upward?

A

The AD-Line moves up when more companies are advancing than declining.

68
Q

What does it indicate when the Market Breadth Index and the FTSE/JSE ALSI move in the same direction?

A

It indicates the market is technically strong, with the majority of shares supporting the overall market movement.

69
Q

What does it indicate when the Market Breadth Index and the FTSE/JSE ALSI move in opposite directions?

A

It signals a technically weak market, implying uncertainty about the market’s long-term direction.

70
Q

What is the Relative Strength Index (RSI)?

A

RSI is a momentum indicator developed by J. Welles Wilder that measures the speed and change of price movements, fluctuating between 0 and 100.

71
Q

How is the RSI calculated?

A

RSI = 100 – [100 ÷ (1 + RS)], where RS = Average gain ÷ Average loss.

72
Q

What does it indicate when the RSI reaches 30?

A

A RSI value of 30 indicates the share is oversold, signaling a possible reversal and a buy opportunity.

73
Q

What does it indicate when the RSI reaches 70?

A

A RSI value of 70 indicates the share is overbought, signaling a potential sell opportunity before the price declines.

74
Q

What period is most commonly used for calculating the RSI?

A

The 14-day period is most commonly used to calculate the RSI.

75
Q

How is the Average Gain calculated for RSI?

A

First average gain = sum of gains over the last 14 days ÷ 14; subsequent gains = [(previous average gain × 13) + current gain] ÷ 14.

76
Q

How is the Average Loss calculated for RSI?

A

First average loss = sum of losses over the last 14 days ÷ 14; subsequent losses = [(previous average loss × 13) + current loss] ÷ 14.

BusMan 142 (7 decks)

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