Technical Analysis

Question 1

Explain principles of technical analysis

Answer 1

Study of investor psychology - price and volume (supply and demand) reflect the collective behavior of buyers and sellers

Only participants who trade affect prices

Better-informed participants tend to trade in greater volume

Question 2

Explain the applications of technical analysis

Answer 2

Charts and patterns can be used to project prices

Question 3

Explain the underlying assumptions of technical analysis

Answer 3

Technical analysis implies that efficient market hypothesis dot NOT hold. Markets reflect both rational and irrational investor behavior

Investor behavior is reflected in trends and patterns that repeat

Question 4

Describe the construction of different types of technical analysis charts and interpret them

Answer 4

Line Charts - Price trends over time

Bar Chart - Price over time. A view of volatility. Low price is a left hatch, high price is a right hatch

Candlestick Chart - Candles lit when Open> Close Candle out when Close>Open

Point and Figure XOXO chart to plot significant price moves (changes in the direction of prices). X = inc P, O = decrease P - no time scale on horizon

Question 5

Explain uses of trend lines (analysis)

Answer 5

To observe the duration of the herd mentality.

Question 6

Explain uses of support lines

Answer 6

Low price range where buying activity is efficient to stop the decline in price

Question 7

Explain uses of resistance lines

Answer 7

High price range where sell activity is sufficient to stop the increase in price

Question 8

Explain a change in polarity

Answer 8

Once a support level is breached it is the new resistance level

Once a resistance level is breached it is the new support level

Question 9

Describe common chart patterns

Answer 9

Reversal Patterns

Continuation Patterns

Question 10

Describe common technical analysis indicators

Answer 10

Price-based

Momentum oscillators

Sentiment

Flow of Funds

Question 11

Priced-Based technical analysis indicators

Answer 11

Bollinger Bands: Plots moving average of security +/- given #SD’s

Moving Average: Use to eliminate noice, use with support and resistance levels.

Golden Cross: SRavg crosses LRavg from below = bullish

Death Cross: SRavg crosses LRavg from top = bearish

Question 12

Momentum Oscillators

Answer 12

Rate of Change: (ROC) When oscillator crosses 0 same direction as trend = buy/sell

Relative Strength Index: Overbought>70, Oversold<30; sum of up changes/sum ab. val. down changes

Question 13

Sentiment technical analysis indicators

Answer 13

Opinion Polls - Financial News

Statistical Indicators

Question 14

Flows of Funds technical analysis indicator

Answer 14

ARMS (TRIN) index: Measures the amount of money moving into rising equities, and out of declining equities.

Margin Debt: More money = greater PP

Mutual Fund Cash Position: Contrarian - Low cash balance means managers are buying. High cash balance means managers need to buy.

New Equity Issuance: managers go public when other managers go public thus driving up demand for IPO’s

Secondary Offerings: Sell out companys treasury stock to increase float (same as new equity issuance)

Question 15

Explain how technical analysts use cycles

Answer 15

Kondratieff: 54 year cycle

18-year cycle - hint *3=Kondratieff

Decennial: Worst performing years end in 0

Presidential: Third election year best, second election year worst

Question 16

Describe the key tenets of Elliot Wave Theory

Answer 16

5 waves in a direction, 3 waves in a correction

Each wave moves in proportion to Fibonacci ratio and Fib Ratio used to ID price targets, potential support, resistance levels

Question 17

Describe the importance of Fibonacci Numbers

Answer 17

Series 0,1 then each # thereafter is the sum of the previous 2.

Basis for Elliot Wave Theory

Value 1.618 is the ratio of large consecutive Fibonacci numbers

Question 18

Describe intermarket analysis as it relates to technical analysis and asset allocation

Answer 18

Technical analysis + major asset classes to ID markets trends and inflections

Look at ratio asset classes or one subset of asset class relative broad asset class: Gold/Silver, Gold/SP500

Question 19

Linear chart scale

Answer 19

Shows constant $ unit changes

Question 20

Logarithmic chart scale

Answer 20

Shows constant % changes

Question 21

Uptrend

Answer 21

Higher highs and higher lows

Question 22

Downtrend

Answer 22

Lowers lows and lower highs

Question 23

Reversal Patterns

Answer 23

Head and Shoulders- S: Rally>uptrend, rally reverses to previous but on lower volume. H: Higher than left shoulder but on lower volume. S: Price same as left then downtrend.

Inverse Head and Shoulders -S: Decline>downtrend, rally occurs but with lower volume. H: Downtrend below shoulder where previous downtrend occured. S: Price breaksout from leftS P

Double Top - Uptrend reverses near previous high price

Double Bottom - Downtrend reverses near previous low price

Triple Top - Three equal peaks

Triple Bottom - three equal troughs

Question 24

Continuation Patterns

Answer 24

Ascending Triangle - top is flat (sellers enforce resistance at the high), bottom is angled

Descending Triangle - bottom is flat (buyers enforce resistance at the low), top is angled

Symmetrical Triangle - Top and bottom are angles

Rectangles - Bullish upside breakout, bearish downside breakout

Question 25

Statistical Indicators (sentiment)

Answer 25

Put/Call ratio: The ratio of open interest on put options relative to call options

CBOE Volatility Index (VIX): Measures volatility via ATM and OTM options courtesy S&P 500

Margin Debt: Bulls increase, Bears decrease

Short Interest: More shorts = more bears

Question 26

Drawing an uptrend line

Answer 26

Connect the increasing lows with a straight line

Question 27

Drawing a downtrend line

Answer 27

Connect the decreasing highs with a straight line