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FINA 408 > Lecture 6 (momentum & volume indicators) (20% of final from this lecture) > Flashcards

Lecture 6 (momentum & volume indicators) (20% of final from this lecture) Flashcards

1
Q

What does volume represent in shares?

A

It is the amount of shares or contracts traded over a period

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2
Q

How is volume portrayed (displayed)?

A

Vertical bar below price chart

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3
Q

How is volume used in price?

A

Volume is used to confirm price, meaning volume is secondary to price analysis

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4
Q

How should high volume move when comparing it to the trend?

A

Volume should move in the direction of the trend

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5
Q

If volume is not moving with the trend, what may it warn you of?

A

Warning of impending trend reversal

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6
Q

What does exceptionally high volume signal?

A

Signals an important change

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7
Q

What are two characteristics of volume as price RISES (uptrend)?

A

1) volume increasing is confirming
2) if volume is decreasing, may put uptrend in question

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8
Q

What are two characteristics of volume as price DECLINES (downtrend)?

A

1) volume increasing is confirming (lower price = more sells)
2) if volume is decreasing, may put downtrend in question

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9
Q

What is the potential signal if price advance halts at high volume?

A

It is a potential top

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10
Q

What is the potential signal if price advance halts at high volume?

A

It is a potential bottom

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11
Q

What does volume display?

A

Volume displays the intensity of a move in price

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12
Q

What are the other 2 methods for analyzing volume confirmation?

A

1) volume indexes
2) volume related oscillators

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13
Q

What are volume indexes, give 5 characteristics

A

1) indexes are compromised of cumulative sims of data measuring supply and demand over time, rather than at a specific period
2) they do not have an upper and lower bound
3) the level of the index is irrelevant, it shows absolute changes
4) compare price with index looking for differences between highs and lows in each
5) can utilize trend lines, sometimes pattern analysis

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14
Q

When are volume indexes more useful?

A

In trending markets

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15
Q

What is “on balance volume”?

A

Cumulative index of plus or minus volume days based on change of closing prices

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16
Q

How is on balance volume calculated?

A

-if price close is higher than previous day, add the day’s volume
-if price close is lower than previous day, deduct the day’s volume

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17
Q

How do you use on balance volume (OBV) when high volume should confirm price trend

A

Compare price to OBV
-if prices reaches a new high, confirmation of price strength comes from OBV hitting a new high

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18
Q

What does a negative divergence between price and OBV warn

A

Warns of potential price reversal

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19
Q

What are volume related oscillators, give 3 characteristics

A

1) oscillate between an upper and lower bound (upper and lower vertical limits).
2) A move to high upper bound level means “overbought” conditions
3) A move to a lower bound level produces an “oversold” conditions
4) shows relative changes
5) used for divergence (differences) analysis, trend lines, sometimes pattern analysis

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20
Q

When are volume RELATED oscillators more useful?

A

Useful for trading ranges

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21
Q

What is a volume oscillator?

A

Is a ratio between two moving averages of volume and is used to determine when volume is expanding or contracting

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22
Q

What does expanding volume in volume oscillator represent?

A

Implies strength in the trend

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23
Q

What does contracting volume in volume oscillator represent?

A

Implies weakness in the trend

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24
Q

When is volume oscillator useful for?

A

Confirming the trend and for giving advanced warning in a trading range of direction for the next breakout

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25
Q

What does a Chaikin money flow produce?

A

produces an oscillator that rises above zero when an upward trend begins and declines below zero when the trend turns downwards

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26
Q

What is negative divergence?

A

When the price and volume say opposite stories (ex: price reaches a higher high, but volume reaches a lower low)

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27
Q

What are volume spikes

A

a sign of a sudden change in information (gap) or other pattern breakout

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28
Q

When are volume spikes most common

A

Most common at the beginning and end of a trend

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29
Q

What is momentum? (give 3 characteristics)

A

1) Can give advance warning of potential trend change since momentum leads price action
2) Momentum is the measure of the velocity of price movements, rather than price movements themselves
3) It is the rate of change of price, how fast it changes, hiw steep the trend is

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30
Q

What is another word for momentum?

A

Price oscillator

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31
Q

What does momentum indicators/oscillators provide?

A

-Provide leading signal generators and confirms price
-Generate entry and exit signal but always with respect to trend direction , therefore momentum signals are to be used secondary to price analysis

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32
Q

How does momentum oscillators work?

A

-oscillate between an upper and lower bound so move to high upper bound level creates and “overbought” condition, and move to a lower bound level means “oversold” condition
-to indicate divergences between momentum and price trend and as a result gives a leading indication to price trend change
-The crossing of the 0 or midpoint line can give you a signal of trend change

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33
Q

What is the meaning of the word “divergences”

A

When momentum fails to confirm the price trend

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34
Q

What is the meaning of negative divergence

A

Price hits a higher high, but momentum oscillator hits a lower high

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35
Q

What is the meaning of positive divergence

A

Price hits a lower low, but momentum oscillator hits a higher low

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36
Q

What is the meaning overbought in momentum

A

When prices are noticeably above the central trend, and hits the upper boundary level of momentum oscillator

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37
Q

What is the meaning of oversold in momentum

A

When prices are noticeably below the central trend, and hit the lower boundary level of a momentum oscillator

38
Q

What is the biggest problem with momentum?

A

Momentum indicator won’t show much on big price changes

39
Q

What are the 4 types of different momentum indicators

A

1) Rate of change (ROC)
2) Moving averages convergence divergence (MACD)
3) Stochastic
4) Relative strength index (RSI)

40
Q

What is moving average convergence divergence (MACD)?

A

The use of both a MACD and signal line plotted on a price chart

41
Q

When does the MACD suggest an upward trend?

A

When the MACD is above the 0 line (short term EMA > Long term EMA)

42
Q

How is MACD line used with signal line for BUY signals

A

Buy signal: When the MACD lines crosses the signal line from BELOW and both lines are above the 0 zone. Best buy signals occur below the 0 zone

43
Q

How is MACD line used with signal line for SELL signals

A

Sell signal: when the MACD lines crosses the signal line from ABOVE and above the 0 zone

44
Q

How can overbought be shown with MACD and signal lines

A

When both lines are far ABOVE the 0 line

45
Q

How can oversold be shown with MACD and signal lines

A

when lines are are far BELOW the 0 line

46
Q

When is MACD most useful

A

Useful in trending markets because it is unbounded (no upper or lower boundaries)

47
Q

What is rate of change (ROC)?

A

-Measures the amount a stock price has changed over a given number (N) of past period
-simplest oscillator but has many issues

48
Q

What are some issues/problems with ROC

A

-suffers from drop off effect
-only two prices appear in the calculation
-prices in the calculation are equally weighted

49
Q

How is ROC used to generate a BUY signal

A

When the ROC crosses the 0 line from BELOW

50
Q

How is ROC used to generate a SELL signal

A

When the ROC goes lower from ABOVE overbought level

51
Q

What is relative strength index (RSI)?

A

Measures a security’s price strength relative to its own past price history
-NOT to be confused with relative strength

52
Q

What is RSI bounded range

A

Bounded by the range of 0-100

53
Q

What is the “score” given to overbought in RSI

A

Anything above 70

54
Q

What is the “score” given to oversold in RSI

A

Anything below 30

55
Q

What is the RSI ranges in a bull market

A

RSI ranges from 55-85

56
Q

What is the RSI ranges in a bear market

A

Ranges from 25-60

57
Q

What are two types of failure swings? describe both

A

Top Failure swing: When a peak in RSI over 70 fails to exceed a previous peak in an uptrend (may signal a top)
-Looks like a double top

Bottom Failure swing: when RSI is in a down trend (under 30), fails to set a new low and then proceeds to exceed a previous peak (may signal a bottom)
-Looks like a double bottom

58
Q

What is stochastic oscillator

A

-As prices increase, prices tend to be at the upper end of the price range, and in down trends price tends to be near the lower end of the range
-Measures current closing price versus defined past window of prices

59
Q

When does stochastic oscillator work best?

A

Works best in trading range markets but still gives valuable info in trading markets

60
Q

What is the score of simplistic overbought stocks in stochastics

A

Anything above 80

61
Q

What is the score of simplistic oversold stocks in stochastics

A

Anything below 20

62
Q

How do you use stochastics in with failure swings? Give description for top and bottom failure swings

A

Top failure swings: When a peak in stochastic over 80 fails to exceed a previous peak in an uptrend (may signal a top)

Bottom failure swings: when stochastic is in down trend (under 20), fails to set a new low and then proceeds to exceed a previous peak (may signal a bottom)

63
Q

What are the 5 methods of analysis

A

1) overbought and oversold
2) divergences
3) cross-overs
4) trend identification
5) classic patterns

64
Q

What is a big similarity between oscillators

A

-they are all similar in use, especially with overbought and oversold bounds
-multiple oscillators may give similar results

65
Q

How can volume be used with price analysis?

A

-Volume is used as a conformational indicator b/c it is a series of price data. However volume doesn’t always confirm price patterns, although it adds value to an entry decision

66
Q

What does strong momentum suggest?

A

Suggest a trending market (uptrend or downtrend)

67
Q

What does weak momentum suggest

A

Suggest a consolidating market (no clear trend)

68
Q

Why do analyst look at the beginning of a trending market?

A

Because momentum tends to lead price direction and because they are often useful in a warning of such change

69
Q

When are oscillators more useful?

A

More useful in trading range markets as overbought/oversold indications

70
Q

Why are oscillators more useful in trending markets

A

Because the are useful as warnings of trend change. In strong trends, they tend to be skewed in the direction of the trend and therefore fail to provide reliable entry signals

71
Q

Following questions are on divergence analysis

A
72
Q

What is market breadth indicators

A

it measures the internal strength of the market by considering whther stocks are gaining or losing strength in price

73
Q

What are some characteristics of advance - decline (breadth) line

A

-best way to measure internal strength of the market index
-the cumulative sum of advancing issues minus declining ones
-Breadth line should follow and move to new highs and lows with the stock market index, if not there is a divergence which will lead to a price reversal
-this indicator may not be as strong as it was in the past
-can be calculated for any index, industry group, exchange, or basket of stocks
-calculated daily, weekly or any period but not applicable to commodities

74
Q

What is the McClennan Oscillator? How is it calculated?

A

-It is related to advance decline
-The difference of 2 exponentil moving averages (19 & 39 day EMAs) of advances - declines

75
Q

What is the score for overbought stocks in McClennan oscillator

A

Overbought: +100 to +150

76
Q

What is the score for oversold stocks in McClennan oscillator

A

Oversold: -100 to -150

77
Q

What is McClennan summation index

A

Measure of the area under the McClennan oscialltor curve by accumulating the daily McClennan oscillator figures into a cumulative index

78
Q

What is the ratio adjusted summation index (RASI) used for?

A

It is used to factor for increases in number of issues, and oscillated between +500 (overbought) and -500 (oversold)

79
Q

What is breadth thrust

A

-It is the ultimate buy signal
-devised the common indicator, calculating the 10 day SMA of advances divided between the sum of advances and declines when the indicator crosses zero and goes above 0.61

80
Q

What does arms index measure

A

-measures relative volume in advancing stocks versus declining stocks

81
Q

What does large volume in declining stocks indicate in arms index

A

The market is likely at a bottom

82
Q

What does large volume in advancing stocks indicate in arms index

A

The market is healthy

83
Q

What are up and down volume indicators made of?

A

Made of 90% downside days and 90% upside days

84
Q

What can 90% downside days help with?

A

Can help with identifying major market bottoms

85
Q

When do 90% downside days occur?

A

They occur when on a particular day the % of the downside volume > total of upside and downside volume by 90% and the percentage of downside points exceeds the total of gained points and lost points by 90%

86
Q

when does 90% upside day occur?

A

When both the upside volume and points gained are 90% of their respective totals

87
Q

When stock market index is rising, what should individual stocks be doing?

A

Most individual stocks should be rising to new highs

88
Q

When stock market index is declining, what should individual stocks be doing?

A

Most individual stocks should go lower and make new lows

89
Q

What is Hindenburg Omen (OH) in up and down volume indicators

A

Signals a reversal downward and potential crash in the market just like the Hindenburg blimp crash

90
Q

what are the characteristics of number of stocks > 30 week moving average

A

-looks at how many stocks are trending by seeing if their price is above a N-day moving average
-30 week is usually used as a contrary indicator, overbought when > 70%, oversold when < 30%
-if >80% and declines to 60% quickly, then likely to decline to around 40% according to Ned Davis

91
Q

If the market is going down, more stock are (blank) 50 week moving average

A

(blank) = Below

FINA 408 (15 decks)

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