Reading 56: Technical Analysis Flashcards
Define Bollinger bands, and identify application examples for them.
Bollinger bands consist of a simple moving average plus upper and lower bands representing a specific number of standard deviations from the moving average.
Application examples:
Short term: Sell the security when it reaches the upper band; purchase the security when it touches the lower band.
Long term: Buy the security once price rises significantly above the upper band; short the security once price falls significantly below the lower band.
Differentiate oversold versus overbought conditions.
Oversold conditions suggest that bearish market sentiment will end soon, while overbought conditions signal that the bullish market sentiment may soon change.
How are momentum oscillators used? Identify examples of their application, and give the formula used to calculate a momentum oscillator (rate of change [ROC] oscillator).
To identify changes in market sentiment. They either fluctuate within a range (usually between 0 and 100) or hover around a number (such as 0 or 100).
Examples include:
The oscillator range for a security can be used to determine the strength of a trend.
They may signal a trend reversal when they reach historical highs or lows.
They can be used to make short-term trading
M = (V − Vx) × 100
where:
M = momentum oscillator value; V = last closing price; Vx = closing price x days ago, typically 10 days
When do double tops and double bottoms occur, and what do they indicate?
Double top: when an uptrend in prices reverses twice at approximately the same price level. Usually the first top has a higher volume.
Double bottom: indicates reversal of a downtrend. Occurs when, following a recent downtrend, prices fall to a certain level, rise, then fall back to the same level and rise again.
These indicate when investors will reverse the prevailing trend at a particular price.
Note: Triple top consists of three peaks at roughly the same level. Triple bottom occurs when three troughs are formed at roughly the same price.
Describe a head and shoulders pattern, and give the calculation used to determine the price target.
A three-part (neckline, head, neckline) pattern that marks the end of an uptrend.
Price target = Neckline − (Head − Neckline)
What are chart patterns? Identify the 2 categories, and explain the most important concept to understand when using them.
They are formations on price charts that look like recognizable shapes. Recurring chart patterns represent collective investor sentiment over time. They can be categorized into 1) reversal patterns and 2) continuation patterns.
The most important concept to understand when utilizing them is that without a clear trend in place prior to the pattern the pattern has no predictive value.
Describe a line chart and how charts are used.
A line chart provides a graphical view of investor sentiment, which can be analyzed quickly. The chart usually connects data points such as closing prices, with time plotted on the horizontal axis and prices plotted on the vertical axis.
Charts are used to illustrate historical price information, which technicians use to infer future price behavior.
How is volume used by technicians?
As a barometer of trend strength. Volume-related information is typically included at the bottom of most charts.
Describe the pattern of the impulse wave in the Elliot wave theory.
In a bull market, 1 = up, 2 = down, 3 = up, 4 = down, and 5 = up. The impulse wave is followed by a corrective wave that has three components: a = down, b = up, and c = down. The same pattern is reversed in a bear market.
Differentiate a golden cross from a dead cross.
A golden cross occurs when the short-term moving average intersects the long-term moving average from below (a bullish signal).
A dead cross occurs when the short-term moving average intersects the long-term moving average from above (a bearish signal).
Identify the relationships that have been observed among different asset classes.
Rising bond prices are a positive for stocks.
Declining bond prices are a signal of commodity prices possibly rising.
A strong dollar usually results in lower commodity prices.
What information does a candlestick chart provide? Identify 4 pieces of information presented in a bar chart.
A candlestick chart provides the same information as a bar chart, but the body of the candle is also shaded if the closing price was lower than the opening price and is clear if the closing price was higher than the opening price.
A bar chart typically provides each time interval with opening price, highest price, lowest price, and closing price.
Describe moving average, and differentiate between a simple moving average and an exponential moving average.
The average of the closing price over a given number of periods. Moving averages smooth out short-term price fluctuations to show a clearer picture of a market trend.
A simple moving average uses the arithmetic mean, weighing each price equally in computing the average.
An exponential moving average attaches a greater weight to recent prices in computing the average.
Define technical analysis and the applicability of it; explain why it can be done quickly and the assumptions underlying it.
Technical analysis:
Uses collective investor sentiment from examining past market trends
Used to predict the future behavior of the overall market and individual securities
Can be used in any freely traded market
Application is limited when there is market manipulation, or illiquid markets with less trading
Can be done quickly because it doesn’t require in-depth knowledge of the security being analyed
Assumptions:
Supply and demand determine prices in real time
Changes in supply and demand cause changes in prices
Prices can be projected with charts and other technical tools
Describe the assumptions made in trend analysis.
Trends usually continue for an extended period of time. Stock price data may show an uptrend, a downtrend, a sideways trend, or no trend at all.
An uptrend occurs when a security’s price makes higher highs and higher lows.
A downtrend is indicated by lower highs and lower lows.
A support level is the price at which there is sufficient buying interest in the stock to arrest the price decline.
A resistance level is the price at which enough selling activity is generated to prevent any further increase in price.
