Module 56.1: Technical Analysis

Question 1

What is technical analysis?

Answer 1

study of collective market sentient, as expressed in buying and selling of assets. prices are 100% driven by supply and demand.

Question 2

What is an advantage of using volume and price to determind value? rather than intrinsic value?

Answer 2

volume and price are observable whereas fundamental analysis has a lot of assumptions.

Question 3

What is relative strength analysis?

Answer 3

an analyst calculates the ratios of an asset’s closing prices to benchmark values such as a stock index and draws a line chart of the ratios.

Question 4

What does a “support and resistance level” signify?

Answer 4

that buying or selling will emerge that prevents further price decreases.

Question 5

What does a head and shoulders pattern signify?

Answer 5

suggests the demand that has been driving the uptrend is fading, especially if each of the highs in the pattern occurs on declining volume.

Question 6

What are double top and triple top patterns?

Answer 6

similar to head and shoulders, but shows that demand driving an uptrend is diminishing.

Question 7

What are continuation patterns? what do triangles indicate?

Answer 7

suggest a pause in a trend rather than a reversal. triangles form when prices reach lower highs and higher lows over a period of time.

triangles indicate that buying and selling pressure have become roughly equal temporarily, but they do imply a change in direction of the trend.

Question 8

What is a rectangle continuing pattern?

Answer 8

when trading forms a range between a support level and a resistance level. assumes the prevailing trend will resume and can be used to set a price target.

Question 9

What are bollinger bands?

Answer 9

constructed based on the standard deviation of closing prices over the last n periods. The bands move away from one another when price volatiltiy inceases and move closer together when prices are less volatile.

Question 10

What do prices at or above and at or below the bolinger bands represent?

Answer 10

at or above - overbought market

at or below - oversold market

Question 11

What is a contrarian strategy?

Answer 11

one that buys when most traders are selling and sells when most traders are buying.

Question 12

What is convergence and divergence of the oscillator and market prices?

Answer 12

convergence - occurs when the oscillator shows the same pattern as prices. suggests price trend will continue.

divergence - occurs when the oscillator shows a different pattern than prices. suggests price trends might change.

Question 13

What is the rate of change oscillator?

Answer 13

calculated as 100 times the difference between the latest closing price and the closing price n periods earlier. oscillates around 0.

Question 14

What is the relative strength index (as an oscillator)?

Answer 14

RSI is based on the ratio of total price increases to total price decreases over a selected number of periods. high values (greater than 70) indicate overbought market. Low values (typically below 30) indicate an oversold market.

Question 15

What is the moving average convergence / divergence oscillator?

Answer 15

drawn using exponentially smoothed moving averages which place greater weight on more recent observations. “the MACD line” is the difference between two exponentially smoothed moving averages of the price. “signal line” is an exponentially smoothed average of the MACD line.

When the MACD line crosses the smoother line, it is a buy signal and vice versa.

Question 16

What is the stochastic oscillator?

Answer 16

calculated from the latest closing price and highest and lowest prices reached in a recent period, such as 14 days.

Question 17

What is the put / call ratio?

Answer 17

put volume divided by call volume can indicate positive or negative outlook on the stock.

Question 18

What is the volatility index?

Answer 18

measures volatility of options on the S&P 500 stock index. high level indicates dear declines in the stock market.

Question 19

What is margin debt?

Answer 19

increases in total margin debt outstanding suggest aggressive buying by bullish margin investors.

Question 20

what is the short interest ratio?

Answer 20

short interest is amount of shares an investor has borrowed and sold short.

Question 21

What is the TRIM (short term trading index) and how is it calculated?

Answer 21

meaure of funds flowing into advancing and declining stocks

= (number of advancing issues / number of declining issues) / (volume of advancing issues / volume of declining issues)

index values greater than 1 indicate majority of volume in declining stocks and vice versa.

Question 22

What is the mutual fund cash position?

Answer 22

ratio of mutual funds cash to total assets. during downtrends, fund cash balances increases and vice versa.

Question 23

how does new equity issuance provide insight into state of economy?

Answer 23

issuers tend to sell new shares when stock prices are thought to be high, may coincide with market peaks.

Question 24

What is the Elliott wave theory?

Answer 24

uptrends consist of 5 waves, and downtrends consist of 3 waves.

the sizes of these waves correspond with Fibonacci ratios (starting with 0,1 and then adding each number).

Question 25

What is intermarket analysis?

Answer 25

refers to analysis of the interrelationships among the market values of major asset classes, such as stocks, bonds, commodities, and currencies.

Question 26

What is a presidential cycle, a decennial pattern, and a kondratieff wave?

Answer 26

presidential cycle - 4 years
decennial pattern - 10 years
kondratieff wave - 54 years.