Technical Analysis Flashcards
Focus: Understand how technical analysis differs from fundamental analysis Learn what the technical indicator names mean and how they are use (no calc) Know the assumptions and tools of tech. analy and understanding how technical analysts reach their conclusions.
Explain principles of technical analysis
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
Explain the applications of technical analysis
Charts and patterns can be used to project prices
Explain the underlying assumptions of technical analysis
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
Describe the construction of different types of technical analysis charts and interpret them
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
Explain uses of trend lines (analysis)
To observe the duration of the herd mentality.
Explain uses of support lines
Low price range where buying activity is efficient to stop the decline in price
Explain uses of resistance lines
High price range where sell activity is sufficient to stop the increase in price
Explain a change in polarity
Once a support level is breached it is the new resistance level
Once a resistance level is breached it is the new support level
Describe common chart patterns
Reversal Patterns
Continuation Patterns
Describe common technical analysis indicators
Price-based
Momentum oscillators
Sentiment
Flow of Funds
Priced-Based technical analysis indicators
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
Momentum Oscillators
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
Sentiment technical analysis indicators
Opinion Polls - Financial News
Statistical Indicators
Flows of Funds technical analysis indicator
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)
Explain how technical analysts use cycles
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
Describe the key tenets of Elliot Wave Theory
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
Describe the importance of Fibonacci Numbers
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
Describe intermarket analysis as it relates to technical analysis and asset allocation
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
Linear chart scale
Shows constant $ unit changes
Logarithmic chart scale
Shows constant % changes
Uptrend
Higher highs and higher lows
Downtrend
Lowers lows and lower highs
Reversal Patterns
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
Continuation Patterns
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
Statistical Indicators (sentiment)
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
Drawing an uptrend line
Connect the increasing lows with a straight line
Drawing a downtrend line
Connect the decreasing highs with a straight line
