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Book 1: Quantitative Methods > Reading 13: Technical Analysis > Flashcards

Reading 13: Technical Analysis Flashcards

1
Q

Technical Analysis (Definition)

A
  1. Study of collective market sentiment
  2. Price effected by supply and demand
  3. Price/volume reflect the collective behavior of buyers and sellers (as only those who trade in the asset determine the price)
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2
Q

Technical Analysis (Assumptions)

A
  1. Rational and Irrational consumers (i.e. refute of efficient market hypothesis)
  2. Trends and patterns repeat over time and can be identified and forecasted
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3
Q

Technical Analysis cf. to fundamental analysis

A

Fundamental analysis looks at the intrinsic value of an asset

FA uses financial statements whereas TA uses price and volume i.e. not why people buy and sell, only what actually happened

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4
Q

Technical Analysis (Advantages)

A
  1. Uses actual data and is not subject to restatement
  2. Can forecast price of assets with no future cash flows
  3. May detect financial fraud before it comes up in financial statements
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5
Q

Technical Analysis (Limitations)

A
  1. Markets where the price may not truly reflect supply / demand e.g. illiquid markets or currencies (where central bank and intervene)
  2. Short covering can obscure true supply / demand (e.g. buying back stock to close a short position)
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6
Q

What are the different types of charts used in technical analysis:

A
  1. Line
  2. Bar
  3. Candlestick
  4. Point Figure
  5. Volume
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7
Q

Line Chart

A

Shows the closing price over a period

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8
Q

Bar Chart

A

High / Low price with closing and opening price shown by dashes on the right and left side of the chart

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9
Q

Candlestick Chart

A

Opening and Closing price.

Clear indicates closing price higher than opening price. Filled indicates closing price lower than opening price

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10
Q

Point and Figure Chart

A

Helpful in identifying changes in price movements

Boxes indicate a movement by a specified price increment

Usually 3 x price increment change will result in a reversed column

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11
Q

Volume Chart

A

Displayed below price charts

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12
Q

Relative Strength Analysis

A

The price of an asset relative to a benchmark. An increase will represent outperformance (positive relative strength)

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13
Q

Uptrend

A

Higher highs and higher lows

Demand > Supply

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14
Q

Downtrend

A

Lower lows and lower highs

Supply > Demand

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15
Q

Trendline (Please state connections for uptrends and downtrends)

A

Connects higher lows on an uptrend and lower highs on a downtrend

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16
Q

Breakout

A

Price > trend line in downturn

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17
Q

Breakdown

A

Price < trend line in upturn

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18
Q

Support Level

A

Price Floor (represented by trendline and indicates buying power restricting further losses)

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19
Q

Resistance Level

A

Price Ceiling (represented by the trendline and indicates selling power restricting further price increases)

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20
Q

Change in polarity

A

Breached support levels become resistance levels and breached resistance levels become support levels

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21
Q

Reversal Patterns

A

Head and Shoulders
Double / Triple Top
Inverse Head and Shoulders and Double / Triple Bottom

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22
Q

Head and Shoulders

A

Indicates waning demand

Difference between top of head and bottom of left shoulder (neckline) indicates the the extent of the price decline

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23
Q

Double / Trip Top/Bottom

A

Indicates weakening in buying / selling pressure as the price approaches a resistance / support level

24
Q

Continuance Patterns

A

Triangles
Rectangles
Flags
Pennants

25
Price Based Indicators
Moving Average Lines Bollinger Lines Oscillators
26
Moving Average Lines
Mean of the last closing prices In an uptrend, the price will be higher than the moving average and vice versa
27
Golden Cross
When the short term moving average line is greater than the long term moving average. This indicates a time to buy
28
Dead Cross
Short term moving average line is lower than the long term moving average. Indicates a time to sell
29
Dougy Bollinger Bands
Standard deviations of closing prices over the last n periods. Usually two standard deviations each side More volatility results in them moving away from each other and vice versa Top of the band indicates an overbought market and the bottom of the bank indicates an oversold marketplace
30
Contrarian Trading Strategy
Do the opposite of what the trading signals say e.g. buy at the lower end of the bollinger band
31
Oscillator is a...
tool to identify when the market may be overbought / oversold
32
Convergence
When an oscillator mimic's the price curve
33
Divergence
When the oscillator does not mimic the price curve and may indicate a change in trend
34
Oscillator examples
Relative Strength Index Rate of Change Oscillator (Momentum Oscillator) MACD (Moving Average Convergence / Divergence) Stochastic Index
35
Rate of Change (Momentum Oscillator) | Formula + Interpretation
100 * (Last Closing Price - Closing Price n periods ago) ``` Positive = Buy Negative = Sell ```
36
Relative Strength Index
Ratio of total price increases to total price decreases over a selected number of periods Higher values = overbought Lower values = oversold
37
Moving Average Convergence / Divergence (MACD)
Exponentially smoothed moving averages that take greater account of recent movements MACD line is the difference between two exponentially smoothed moving averages of the price A Signal line is the exponentially smoothed moving average of the MACD line
38
MACD Interpretation
When the MACD line goes above theSignal line, this indicates a buy signal and vice versa
39
Stochastic Oscillator
Calculated by looking at the latest closing price relative to the highest / lowest price during a specified period Consists of two lines: 1. %K = difference between the latest closing price and a recent low as a % of the difference between high / low prices over a period 2. %D = 3 period average of the %K
40
Stochastic Oscillator Interpreation
Similar to the MACD line, a buy signal is when the %K crosses the %D and vice versa
41
Non-Price Based Indicators
Put / Call Ratio Volatility Index Margin Debt Short Interest Ratio
42
Put / Call Ratio
Put Options increase in value when the price of an asset drops Call Options increase when the price of an assets increase Thus when the the Put / Call ratio drops, the price is likely to decrease and vice versa. Often viewed from a contrarian standpoint through so an increase in the put / call ratio would be an indication to buy
43
Volatility Index (VIX)
Run by the Chicago Board Options Exchange and measures the volatility of options in the S&P500 A high VIX indicates that investors anticipate declines in the stock market Usually interpreted from a contrarian standpoint e.g. low VIX indicates a time to sell
44
Margin Debt
Increased margin debt = increased prices Decreased margin debt = decreased prices
45
Short Interest Ratio
Indicates strong negative sentiment However investors are split about its interpretation as a high ratio might also indicate more buying as short sellers have to close out their short positions
46
Flow of Funds Indicators
Arms Ratio / Short Term Trading Index (TRIM) Margin Debt Mutual Fund Cash Position New Equity Issuance
47
Arms Ratio / TRIM
Measure of funds flowing into advancing and declining stocks ``` 1 = even flow +1 = more in declining stocks -1 = more in advancing stocks ```
48
Margin Debt (Flow of Funds Application)
Indicates increased willingness to buy stocks
49
Mutual Fund Cash Position
More Cash indicates that mutual funds have a bearish outlook. Usually a contrarian indicator though more cash is an indication to buy
50
New Equity Issuance (IPO's)
Indicates peak of the market
51
Common Cycles
4-year Presidential Term 10-year Decennial Pattern 54-year Kondratieff Wave
52
Elliot Wave Theory
Based on the belief that market prices can be explained by a set of interconnected cycles
53
"Waves"
Chart patterns that occur in relation with the Elliot Wave Theory Each big movement consists of 5 waves up/down then reversal in the trend will be indicated by a new 3 wave movement Size of the waves are said to correspond with the Fibonacci Numbers
54
Fibonacci Ratio
Starting with 0 and 1, the next number is the sum of the previous two numbers The number can be used to predict the size of the next wave e.g. a down leg can be 1/2 the size of an up leg
55
Fibonacci Ratio Convergence
0.618 and 1.618 as the numbers in the sequence get larger
56
Intermarket Analysis
Analysis of the interrelationships among the market values of major asset classes e.g. stocks/bonds/commodities Relative Strength Ratios (e.g. increases / decreases) indicate which asset classes are outperforming others Useful for comparing the relative performance of equity market sectors or industries and of various international markets

Book 1: Quantitative Methods (10 decks)

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