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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
Q

Price Based Indicators

A

Moving Average Lines
Bollinger Lines
Oscillators

26
Q

Moving Average Lines

A

Mean of the last closing prices

In an uptrend, the price will be higher than the moving average and vice versa

27
Q

Golden Cross

A

When the short term moving average line is greater than the long term moving average. This indicates a time to buy

28
Q

Dead Cross

A

Short term moving average line is lower than the long term moving average. Indicates a time to sell

29
Q

Dougy Bollinger Bands

A

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
Q

Contrarian Trading Strategy

A

Do the opposite of what the trading signals say e.g. buy at the lower end of the bollinger band

31
Q

Oscillator is a…

A

tool to identify when the market may be overbought / oversold

32
Q

Convergence

A

When an oscillator mimic’s the price curve

33
Q

Divergence

A

When the oscillator does not mimic the price curve and may indicate a change in trend

34
Q

Oscillator examples

A

Relative Strength Index
Rate of Change Oscillator (Momentum Oscillator)
MACD (Moving Average Convergence / Divergence)
Stochastic Index

35
Q

Rate of Change (Momentum Oscillator)

Formula + Interpretation

A

100 * (Last Closing Price - Closing Price n periods ago)

Positive = Buy
Negative = Sell
36
Q

Relative Strength Index

A

Ratio of total price increases to total price decreases over a selected number of periods

Higher values = overbought
Lower values = oversold

37
Q

Moving Average Convergence / Divergence (MACD)

A

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
Q

MACD Interpretation

A

When the MACD line goes above theSignal line, this indicates a buy signal and vice versa

39
Q

Stochastic Oscillator

A

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
Q

Stochastic Oscillator Interpreation

A

Similar to the MACD line, a buy signal is when the %K crosses the %D and vice versa

41
Q

Non-Price Based Indicators

A

Put / Call Ratio
Volatility Index
Margin Debt
Short Interest Ratio

42
Q

Put / Call Ratio

A

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
Q

Volatility Index (VIX)

A

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
Q

Margin Debt

A

Increased margin debt = increased prices

Decreased margin debt = decreased prices

45
Q

Short Interest Ratio

A

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
Q

Flow of Funds Indicators

A

Arms Ratio / Short Term Trading Index (TRIM)
Margin Debt
Mutual Fund Cash Position
New Equity Issuance

47
Q

Arms Ratio / TRIM

A

Measure of funds flowing into advancing and declining stocks

1 = even flow
\+1 = more in declining stocks
-1 = more in advancing stocks
48
Q

Margin Debt (Flow of Funds Application)

A

Indicates increased willingness to buy stocks

49
Q

Mutual Fund Cash Position

A

More Cash indicates that mutual funds have a bearish outlook.

Usually a contrarian indicator though more cash is an indication to buy

50
Q

New Equity Issuance (IPO’s)

A

Indicates peak of the market

51
Q

Common Cycles

A

4-year Presidential Term
10-year Decennial Pattern
54-year Kondratieff Wave

52
Q

Elliot Wave Theory

A

Based on the belief that market prices can be explained by a set of interconnected cycles

53
Q

“Waves”

A

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
Q

Fibonacci Ratio

A

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
Q

Fibonacci Ratio Convergence

A

0.618 and 1.618 as the numbers in the sequence get larger

56
Q

Intermarket Analysis

A

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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