Module 56.1: Technical Analysis Flashcards
What is technical analysis?
study of collective market sentient, as expressed in buying and selling of assets. prices are 100% driven by supply and demand.
What is an advantage of using volume and price to determind value? rather than intrinsic value?
volume and price are observable whereas fundamental analysis has a lot of assumptions.
What is relative strength analysis?
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.
What does a “support and resistance level” signify?
that buying or selling will emerge that prevents further price decreases.
What does a head and shoulders pattern signify?
suggests the demand that has been driving the uptrend is fading, especially if each of the highs in the pattern occurs on declining volume.
What are double top and triple top patterns?
similar to head and shoulders, but shows that demand driving an uptrend is diminishing.
What are continuation patterns? what do triangles indicate?
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.
What is a rectangle continuing pattern?
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.
What are bollinger bands?
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.
What do prices at or above and at or below the bolinger bands represent?
at or above - overbought market
at or below - oversold market
What is a contrarian strategy?
one that buys when most traders are selling and sells when most traders are buying.
What is convergence and divergence of the oscillator and market prices?
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.
What is the rate of change oscillator?
calculated as 100 times the difference between the latest closing price and the closing price n periods earlier. oscillates around 0.
What is the relative strength index (as an oscillator)?
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.
What is the moving average convergence / divergence oscillator?
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.
What is the stochastic oscillator?
calculated from the latest closing price and highest and lowest prices reached in a recent period, such as 14 days.
What is the put / call ratio?
put volume divided by call volume can indicate positive or negative outlook on the stock.
What is the volatility index?
measures volatility of options on the S&P 500 stock index. high level indicates dear declines in the stock market.
What is margin debt?
increases in total margin debt outstanding suggest aggressive buying by bullish margin investors.
what is the short interest ratio?
short interest is amount of shares an investor has borrowed and sold short.
What is the TRIM (short term trading index) and how is it calculated?
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.
What is the mutual fund cash position?
ratio of mutual funds cash to total assets. during downtrends, fund cash balances increases and vice versa.
how does new equity issuance provide insight into state of economy?
issuers tend to sell new shares when stock prices are thought to be high, may coincide with market peaks.
What is the Elliott wave theory?
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).
