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Study Session 3
Quantitative Methods: Application

Reading 13
Technical Analysis

Learning Outcomes for Study Session 3 - Reading 13:
Reading 13: Technical Analysis

LOS 13.a: Explain principles of technical analysis, its applications, and its underlying assumptions.

LOS 13.b: Describe the construction of different types of technical analysis charts and interpret them.

LOS 13.c: Explain uses of trend, support, and resistance lines, and change in polarity.

LOS 13.d: Describe common chart patterns.

LOS 13.e: Describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and
flow of funds).

LOS 13.f: Explain how technical analysts use cycles.

LOS 13.g: Describe the key tenets of Elliott Wave Theory and the importance of Fibonacci numbers.

LOS 13.h: Describe intermarket analysis as it relates to technical analysis and asset allocation.

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Study Session 3
Quantitative Methods: Application

Reading 13
Technical Analysis

LOS 13.a: Explain principles of technical analysis, its applications, and its underlying
assumptions.


Technical analysis involves the examination of past market data, such as prices and volume, and
using this historical data to estimate future price trends. Based on these estimates, investment decisions
are made.

Assumptions underlying technical analysis

There are several assumptions underlying technical analysis:

1. The market for any goods or services is determined solely by the interaction of supply and demand.
2. Supply and demand is governed by numerous factors, both rational and irrational.
3. The prices for individual securities and the overall value of the market tend to move in trends,
which persist for appreciable lengths of time.
4. Prevailing trends change in reaction to shifts in supply and demand relationships.
5. Security prices adjust gradually to new information, and market prices are determined by the
interaction between supply and demand.

Differences between technical analysis and fundamental analysis

There are two main differences between technical analysts and those who believe in efficient markets:

1. The dissemination of information:

a. Technical analysts believe that the information dissemination process is different for various
stakeholders. They believe that news takes time to travel from the insider and expert to the
individual investor.
b. Fundamental analysts believe that the information dissemination is very quick.

2. The second difference relates to how quickly investors adjust security prices to reflect new
information.

a. Technical analysts believe that price adjustment is not instantaneous. As a result, they believe
that security prices move in trends that persist, and therefore, past price trends and volume
information along with other market indicators can help you determine future price trends.
b. Fundamentalists believe that prices adjust quickly to new information.

The following are the advantages of technical analysis:

• Not heavily dependent on financial accounting statements
• It is quick
• It incorporates psychological reasons behind price changes


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LOS 13.b: Describe the construction of different types of technical analysis charts and
interpret them.


Technical analysis uses price and volume data predominantly when looking at asset prices and market
movements.
The charts that are used are most often based on time. The analyst will look at past periods to
determine trends or patterns.

We will now look at some of the charts used by technical analysts:

Line charts

A line chart will show the closing price for each given period on a straight line.

Bar charts

A bar chart shows for any time period (daily, weekly or monthly) the high and low price connected to
form a bar with a small horizontal line across the vertical bar to indicate the closing price. Typically the
trading volume is shown at the bottom.

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Candlestick charts

Candlesticks charts work on the same basis as bar charts but work with the use of boxes.
The box will be clear if the closing price is higher than the opening price.
The box will be filled if the closing price is lower than the opening price.
This allows the analyst to recognize patterns very easily.

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Point and figure charts

In a point and figure chart, the price is plotted on the y-axis, but on the x-axis, significant price changes
are recorded regardless of their timing. The technician has to determine what price interval to record as
significant and when to note price reversals. These charts are then used to make predictions about price
movements, although they cannot predict the time horizon for these price movements.

Volume charts

Relative strength

Technicians believe that if an individual stock is outperforming the market, it will continue to do so. As a
result, they compute relative-strength ratios for stocks or industries as follows:

!"#$% '()$*
Relative-strength ratio =
+,-.* #/ !*()*0 (*.3.!&'566)

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If the ratio increases over time, it shows the stock is outperforming the market and technicians would
expect this outperformance to continue.

LOS 13.c: Explain uses of trend, support, and resistance lines, and change in polarity.


Trends

Technical analysts work with trends in prices.

An uptrend is when prices are moving upwards and means that demand is increasing relative to
supply.

A downtrend is when prices are moving downwards and means that supply is increasing relative to
demand.

Trendlines

A trendline is drawn on a chart to help determine if the trend is continuing or reversing.
When prices move out of their trends, it is called a breakout from a downtrend or a breakdown from
an uptrend.

Support and resistance levels

A support level is a price range at which the technician would expect a substantial increase in the
demand for a stock. A resistance level is the price range at which the technician would expect an
increase in the supply of a stock and for the price of the stock to stop increasing and reverse.

Change in polarity

A change in polarity is when resistance levels have been breached then become support levels at that
same price. The same would apply to breached support levels becoming resistance levels.

LOS 13.d: Describe common chart patterns.

Reversal patterns

This occurs when the trend stops at a point and does not go beyond that trend.
A common reversal pattern is the head and shoulders:

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The ‘head’ is the highest price reached; the ‘shoulders’ are the two price points on either side of the
head. The ‘neckline’ is the support level, that if broken, the price is expected to fall further.

Another common reversal pattern is the double and triple top

The triple top and double top indicate weakness in the buying or the selling pressure and will indicate a
move in the other direction.

Reversals of downtrends are called inverse head-and-shoulder, double bottom and triple bottom
patterns.

Continuation patterns

These indicate a pause rather than a reversal in the trend.

A triangle is formed when prices reach lower highs and higher lows over a period of time.
The triangle suggests that both buying and selling pressure are equal.

A rectangle is formed when trading forms a range between the support level and the resistance level.
We also see flags and pennants are rectangles and triangles that appear on a short-term price chart.
.

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LOS 13.e: Describe common technical analysis indicators (price-based, momentum

oscillators, sentiment, and flow of funds).


Price-based indicators

Moving-average lines

Technicians use a moving average of past prices as an indicator of a long-term trend. Technicians
further use intersections between two moving averages as buy or sell signals.

Bollinger bands

These are bands that are constructed based on the standard deviation of closing prices over a certain
period. High and low bands are drawn. As volatility increases the bands move away from each other. As
volatility decreases the bands move closer together.

Oscillators

Oscillators will also indicate if the market is overbought or oversold.
They are based on market prices but are scaled to a given value, i.e. oscillate around a given value.
Very high values are an indication of an overbought market.
Very low values are an indication of an oversold market.

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Examples of oscillators include:

Rate of change (ROC) oscillator

A ROC oscillator is a momentum oscillator and is calculated as 100 times the difference between the
current closing price and the closing price for previous periods.

A buy indicator is when the oscillator changes from negative to positive during an uptrend in prices.
A sell indicator is when the oscillator changes from positive to negative during a downtrend in prices.

Relative strength

Technicians believe that if an individual stock is outperforming the market, it will continue to do so. As a
result, they compute relative-strength ratios for stocks or industries as follows:

!"#$% '()$*
Relative-strength ratio =
+,-.* #/ !*()*0 (*.3.!&'566)

If the ratio increases over time, it shows the stock is outperforming the market and technicians would
expect this outperformance to continue.

Moving average convergence / divergence (MACD)

The MACD is drawn up using exponentially smoothed moving averages. Greater weight is placed on the
more recent observations.

The MACD oscillator will be used to indicate overbought or oversold conditions. They can also be used
to identify convergence to or divergence from price trends.

When the MACD line crosses above the smooth signal line, this is a buy.
When the MACD line crosses below the smooth signal line, this is a sell.

Stochastic oscillator

This Stochastic oscillator is calculated from the latest closing price and the highest and lowest prices for
a certain period.

In an uptrend, prices will close closer to their recent highs.
In a downtrend, prices will close closer to their recent lows.

Non-Price-based indicators

Most of the indicators that we have presented thus far are based on price and volume. We will now look
at indicators sentiment called sentiment indicators. These are used to discern the views and opinions
of the market buyers and sellers. It will help the analyst determine if the market is feeling ‘bullish’ or
‘bearish’.

Put call ratio

CBOE put/call ratio – The technicians consider an increase in the number of put options (which give
the holder the right to sell a stock at a specified price for a given time period) as signals of a bearish
attitude.

8.9:*( #/ '."0
Put/call ratio =
8.9:*( #/ ;,--0

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The technician's reason that a higher put/call ratio indicates a more bearish attitude in the market,
which they consider to be a bullish indicator.

The ratio fluctuates between 0.50 and 0.30 with 0.50 considered bullish and 0.30 considered bearish.

Volatility index

The volatility index is also called the VIX. The VIX measures the overall volatility of options taken out on
the S&P 500 index.

High levels in the index indicate less fear in the market.
Low levels in the index indicate more fear in the market.

Margin debt

This represents the borrowing of investors from their brokers in order to invest in shares. An increase
in borrowing by smart investors would be a bullish sign.

A decrease in borrowing indicates selling. This is a bearish sign for smart money technicians.

Short interest

Short sales by specialists – Technicians who want to follow smart money often watch the specialists.

!<*$),-)0"0 0=#(" 0,-*0
Short sales by specialists ratio =
>#",- 0=#(" 0,-*0 #? "=* 8@!A

Technicians view a decline in the ratio below 30 percent as a bullish sign because it means that
specialists are attempting to limit their short sales.

A ratio above 50 percent is a bearish sign.

Mutual fund cash position

Mutual funds’ ratios of cash as a percentage of the total assets in their portfolio are reported in the
financial press.

Historically the ratio has varied between 5 and 13 percent. As contrary-opinion technicians believe that
mutual funds will have a high percentage of cash near the bottom of a cycle and almost fully invested at
the market peak, they will do the opposite. This means buying when the cash ratio approaches 13
percent and selling when the ratio approaches 5 percent.

A further reason why a high mutual fund cash position can be considered a bullish indicator is that
technicians believe these cash funds will eventually have to be invested in equities and will then cause
the stock prices to increase.

The Arms index / short-term trading index

This index is also known as the TRIN index. It measures the funds that flow into advancing vs declining
stocks.

# #/ ,CD,?$)?3 )00.*0
E# #/ C*$-)?)?3 )00.*0
TRIN = +#-.9* #/ ,CD,?$)?3 )00.*0
E+#-.9* #/ C*$-)?)?3 )00.*0

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When the index is at or around 1, this suggests that advancing and declining issues are more or less
even.

An index of less than 1 indicates greater volume in advancing stocks.
An index of greater than 1 indicates greater volume in declining stocks.

New equity issuance

This will include secondary offerings. The thinking is that most issuers tend to sell stocks when the
prices are at their highs, an increase in issuance could indicate a market high.

LOS 13.f: Explain how technical analysts use cycles.

The theory behind cycles is that events occur in cycles. Analysts apply cycle theory to the markets in an
attempt to identify cycles in prices.

Examples of cycles include:

Presidential cycles: Every 4 years
Decennial cycles: Every 10 years
Kondratieff wave: Every 54 years.

LOS 13.g: Describe the key tenets of Elliott Wave Theory and the importance of
Fibonacci numbers.


One of the main cycle theories is the Elliot Wave theory.

The theory states that market prices are described in an interconnected set of cycles, with the periods
ranging from a few minutes to hundreds of years.

The waves in the chart refer to patterns.
When the market is in an uptrend – upward moves in prices move in five waves, and the down moves
occur in three waves.

When the market is in a downtrend – downward moves in prices move in five waves, and the upward
moves occur in three waves.

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Upward Impulse Wave Downward Impulse Wave

The wave sizes work closely with Fibonacci ratios. These ratios start with numbers 0 and 1. They then
add the previous two numbers to get to the next number.
An example of this would be, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 etc.

The analysts believe that Fibonacci numbers can be used to arrive at price targets.

LOS 13.h: Describe intermarket analysis as it relates to technical analysis and asset
allocation.


Intermarket analysis is the analysis of the interrelationships between the various asset classes within
the market. These include the relationship between equities, bonds, currencies, etc.

Relative strength ratios can be used to assess which asset classes are outperforming the other classes.




















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EDGE SUMMARY
Reading 13 – Technical Analysis

Technical analysis assumptions

1. The market for any goods or services is determined solely by the interaction of supply and demand.
2. Supply and demand is governed by numerous factors, both rational and irrational.
3. The prices for individual securities and the overall value of the market tend to move in trends, which persist for
appreciable lengths of time.
4. Prevailing trends change in reaction to shifts in supply and demand relationships.
5. Security prices adjust gradually to new information, and market prices are determined by the interaction between supply
and demand.

Differences between technical analysis and fundamental analysis

There are two main differences between technical analysts and those who believe in efficient markets:

1. The dissemination of information:

a. Technical analysts believe that the information dissemination process is different for various stakeholders.
b. Fundamental analysts believe that the information dissemination is very quick.

2. How quickly investors adjust security prices to reflect new information.

c. Technical analysts believe that price adjustments are not instantaneous.
d. Fundamentalists believe that prices adjust quickly to new information.

Technical analysis charts

Technical analysis uses price and volume data predominantly when looking at asset prices and market movements.
The charts that are used are most often based on time. The analyst will look at past periods to determine trends or patterns.

Chart types:

Line charts
A line chart will show the closing price for each given period on a straight line.

Bar charts
A bar chart shows for any time period (daily, weekly or monthly) the high and low price connected to form a bar with a small
horizontal line across the vertical bar to indicate the closing price.

Candlestick charts
Candlesticks charts work on the same basis as bar charts but work with the use of boxes.

Point and figure charts

In a point and figure chart, the price is plotted on the y-axis, but on the x-axis, significant price changes are recorded regardless
of their timing. The technician has to determine what price interval to record as significant and when to note price reversals.

Relative strength
Technicians believe that if an individual stock is outperforming the market, it will continue to do so. As a result, they compute
relative-strength ratios for stocks or industries as follows:

!"#$% <()$*
Relative-strength ratio = +,-.* #/ "=* 0*()*0 (*.3. !&' 566)

Trend, support and resistance lines

Trends
Technical analysts work with trends in prices.

An uptrend is when prices are moving upwards and means that demand is increasing relative to supply.
A downtrend is when prices are moving downwards and means that supply is increasing relative to demand.

Trendlines
A trendline is drawn on a chart to help determine if the trend is continuing or reversing.
When prices move out of their trends, it is called a breakout from a downtrend or a breakdown from an uptrend.

Support and resistance levels

A support level is a price range at which the technician would expect a substantial increase in the demand for a stock.

Change in polarity
A change in polarity is when resistance levels have been breached then become support levels at that same price. The same
would apply to breached support levels becoming resistance levels.

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Common chart patterns

Reversal patterns
This occurs when the trend stops at a point and does not go beyond that trend. A common reversal pattern is the head and
shoulders.

Continuation patterns
These indicate a pause rather than a reversal in the trend.
A triangle is formed when prices reach lower highs and higher lows over a period of time.
A rectangle is formed when trading forms a range between the support level and the resistance level. We also see flags and
pennants are rectangles and triangles that appear on a short-term price chart.

Price-based indicators

Moving-average lines
Technicians use a moving average of past prices as an indicator of a long-term trend.

Bollinger bands
These are bands that are constructed based on the standard deviation of closing prices over a certain period.

Oscillators
Oscillators will also indicate if the market is overbought or oversold.
Examples of oscillators include:
• Rate of change (ROC) oscillator
• Relative strength
• Moving average convergence / divergence (MACD)
• Stochastic oscillator

Non-price-based indicators

We will now look at indicators sentiment called sentiment indicators.

Put call ratio

CBOE put/call ratio – The technicians consider an increase in the number of put options as signals of a bearish attitude.

8.9:*( #/ <."0
Put/call ratio = 8.9:*( #/ $,--0

The technician's reason that a higher put/call ratio indicates a more bearish attitude in the market, which they consider to be a
bullish indicator.

Volatility index
The volatility index is also called the VIX. This measures the overall volatility of options taken out on the S&P 500 index.

Margin debt
This represents the borrowing of investors from their brokers in order to invest in shares.

Short sales by specialists – Technicians who want to follow smart money often watch the specialists.

!<*$),-)0"F 0 0=#(" 0,-*0
Short sales by specialists ratio =
>#",- 0=#(" 0,-*0 #? "=* 8@!A

Technicians view a decline in the ratio below 30 percent as a bullish sign because it means that specialists are attempting to
limit their short sales. A ratio above 50 percent is a bearish sign.

Mutual fund cash position

Mutual funds’ ratios of cash as a percentage of the total assets in their portfolio are reported in the financial press.
Historically the ratio has varied between 5 and 13 percent.

The Arms index / short-term trading index

This index is also known as the TRIN index. It measures the funds that flow into advancing vs declining stocks.

# GH IJKILMNLO NPPQRP
# GH JRMSNLNLO NPPQRP
TRIN = TGSQUR GH IJKILMNLO NPPQRP
TGSQUR GH JRMSNLNLO NPPQRP

When the index is at or around 1, this suggests that advancing and declining issues are more or less even.
An index of less than 1 indicates greater volume in advancing stocks.
An index of greater than 1 indicates greater volume in declining stocks.

New equity issuance
This will include secondary offerings. The thinking is that most issuers tend to sell stocks when the prices are at their highs, an
increase in issuance could indicate a market high.

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EDGE CHECKERS
Reading 13 – Technical Analysis

1. Elliott wave theory observes how markets move. The key elements that R. N. Elliott proposes affect the way
the market moves are in waves that are described by:

A. Sentiment polls
B. Moving averages
C. Fibonacci ratios

2. Kade Langford, CFA, remarks to a colleague that he thinks tracking investors borrowing habits is a good way
of predicting market movements, particularly when trying to spot a peak in the market ahead of a
deterioration. Which of the sentiment indicators below is the one that he is defining?

A. CBOE Volatility index
B. Margin debt
C. Put/call ratio

3. Chart patterns can be categorized into 2 main parts, specifically:

A. Resistance and continuation
B. Reversal and resistance
C. Reversal and continuation

4. R.N.Elliot in 1938 suggested a theory that the market moves in regular, repeated waves or cycles. Which of the
succeeding options does not signify one of the Elliot cycles under Elliot Wave Theory?

A. Grand supercycle
B. Minuette
C. Elementary

5. Support is most appropriately labeled as:

A. A price range where selling activity is sufficient to stop a rise in price
B. A price range where selling activity is sufficient to stop a decline in price
C. A price range where buying activity is sufficient to stop a decline in price

6. Technical traders tend to think that the market is:

A. They do not always have a view on market efficiency
B. Efficient
C. Not Efficient

7. Bollinger Bands are created by plotting:

A. A security's price over a set period
B. A moving-average line with lower and upper lines that are at a set number of standard deviations apart
C. The average of the closing price of a security over a specified number of periods.

8. The greater the volatility of the underlying instrument, a technical trader would enjoy a data set that has:

A. More frequent data sampling
B. Less frequent data sampling
C. Less volatile data sampling

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9. A time series computed as the cumulative number of daily advances minus daily declines are identified as:

A. Short sales by specialists
B. Moving averages
C. Breadth of market

10. Volume is a significant characteristic of technical trading. When the volume is increasing it is said to point to:

A. No real clue as to the current trend
B. Confirming the current trend
C. A reversal in the current trend

11. Which of the subsequent statements is least probable to be precise: Intermarket Analysis is the area of
technical analysis that seeks to find a relationship between the way that:

A. Different stocks in different sectors are related
B. Different stocks in the same market are related
C. Different stocks in different countries are related

12. What is the main difference when using technical analysis for the bond market associated to equities?

A. Trading volume for bonds is harder to attain
B. Moving averages are studied for both bonds and equities
C. Support and resistance levels are studied

13. Given an inverse head and shoulders pattern, which of the subsequent options is most probable to be the
target price?

Neckline = $10,000
Shoulder = $7,800
Head = $6,500

A. $7,800
B. $13,500
C. $6,500

14. A line chart has less data than a candlestick chart, which of the below information is absent?

A. Volume
B. Price movements and trends
C. Opening and closing prices and daily fluctuation

15. The candle on a candlestick chart has a dark body, and the ‘wick’ extends out the top but doesn’t show from
the bottom. Which of the subsequent statements is true?

A. The stocks price went down today, and the closing price was the lowest price of the day
B. The stocks price went up today and never went below the opening price
C. The stocks price went down today and never went below the opening price

16. A security has entered a trading pattern that has a flat support line and a declining resistance line. Which of
the below is the name of that pattern?

A. Descending triangle
B. Ascending triangle
C. Symmetrical triangle

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17. A downtrend line can be created by drawing a line that joins the:

A. Lowest low to the highest high of the price chart
B. Highs of the price chart
C. Lows of a price chart

18. When interpreting a price chart, the observation of high or increasing volume is most expected to be
indicating which of the below?

A. Confirms a rising or declining trend in prices
B. A trendless point will follow
C. A reversal of in the price trend

19. A good depiction of an uptrend in the security’s price is that it is going to experience:

A. Higher highs and lower lows
B. Higher highs and higher lows
C. Lower highs lower lows

20. When a stock’s price breaks out of a triangle, the size of the breakout is usually nearest to the amplitude of the
triangle:

A. Three-quarters of the way through the triangle
B. When it first forms
C. Halfway through the length of the triangle

21. Which of the following is not an assumption of technical analysis?

A. Security prices move in trends that persist for short periods
B. Prices are determined by supply and demand
C. Supply and demand is driven by rational and irrational behavior

22. To draw a downtrend line, the analyst has to draw a line that joins all the prior:

A. Highs of the trend period
B. Lows of the trend period
C. Midpoints of the trend period

23. An uptrend line can be created by drawing a line that joins the:

A. highest high to the lowest low of the price chart
B. lows of a price chart
C. highs of a price chart

24. Which of the below best describes the concept of resistance in the setting of technical analysis?

A. A price range in which buying activity is sufficient to stop the rise in price of a security
B. A price range in which selling activity is sufficient to stop the rise in price of a security
C. A price range in which buying activity is sufficient to stop the decline in price of a security

25. Which of the below is least probable to be seen as a reversal pattern?

A. Triangle patterns
B. Head and shoulders pattern
C. Double top patterns

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26. Technical analysis relies most highly on:

A. the roll of a dice
B. extensive financial statements
C. price and volume data

27. An analyst completes a Relative Strength Analysis of a stock. She creates a line that is downward sloping. What
conclusions can she draw about the stocks price?

A. She can’t say for sure whether the price is going up or down
B. The stock price is rising
C. The stock price is declining

28. Using Bollinger bands, a contrarian investor would be most probable to purchase when the security’s price:

A. Goes below the lower band
B. Goes above the upper band
C. Goes above the moving average

29. Which of the subsequent technical indicators is a momentum oscillator?

A. Relative strength index
B. Bollinger bands
C. Flow of funds

30. 2 analysts, Kade and Kane, are looking at charts in order to forecast price movements. Kade tells Kane that
when a ‘head and shoulders’ pattern forms it shows that the trend is reversing. A particular security had been
trending up before the pattern arose, and Kane suggests a target price that is = to the neckline minus the
amplitude of the shoulders of the pattern after breakout happens. Are the 2 analysts accurate concerning this
pattern's aspects?

A. Neither are correct
B. Kade and Kane are correct
C. Only Kade is correct

31. Technical analysts are more expected to believe that people are:

A. Irrational and unemotional
B. Rational and unemotional
C. Irrational and emotional

32. One of the sentiment indicators, the short interest ratio, is = to the short interest in a stock / by the trading
volume over what period?

A. Average annual
B. Average daily
C. Average monthly

33. In comparison with fundamental analysis, technical analysis can be said to be:

A. More correct
B. More objective
C. More subjective

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34. When a security’s price has been going up for some time, its 20-day moving average will be most expected to
be:

A. More than the security’s price
B. Less than the security’s price
C. Not related to the security’s price

35. As a technical analyst, you are given the task of trying to identify Intermarket relationships, which of the
below are you most probable to use to identify these relationships?

A. Momentum Oscillators
B. Sentiment Indicators
C. Relative Strength Analysis

36. Under the Elliott Wave theory, in a bull run, how many corrective waves exist:

A. 8
B. 3
C. 5

37. A ‘Dead Cross’, which is a price-based moving average expression, best defines which of the subsequent
situations?

A. Long-Term moving average drops below short-term - bearish signal
B. Short term moving average drops below long-term - bullish signal
C. Short term moving average drops below long-term - bearish signal

38. Which of the below would most possibly be a point of a reversal of a trend?

A. Steady volumes
B. Rising volumes
C. Declining volumes

39. Technical analysis would give more importance on:

A. Price and Volume Data
B. Macroeconomic Data
C. Industry Specific Data

40. Jake Whingding, a candidate for the Level 1 exam, thinks that Relative Strength Analysis is an esteemed
investment tool. He remarks to a colleague, ‘Relative Strength Analysis is the ratio of a particular stock price to
an index’ and says that ‘when the line slopes upwards this displays an outperformance of that stock to the
index’. Is he precise with regard to both statements?

A. No, and No
B. Yes, and Yes
C. No, and Yes

41. Under the Flow-of-funds indicator group, the ARMS index, also termed the TRIN, what would you presume to
get as a figure if the market was having a down trending day?

A. Above 1
B. Below 1
C. Around 1

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42. In the situation of technical analysis the principle states that once a support level is violated, it becomes a
resistance level that is recognized as the:

A. change in polarity principle
B. wave principle
C. divergence principle

43. Candlestick charts and bar charts are very alike except that a candlestick chart:

A. the horizontal axis represents the number of changes in price, not time
B. has a body that is either light or dark depending on whether the stock closed higher or lower than its open
C. represents downward movements in price with O's

44. Which of the below is least probable to be a Price-based Indicator?

A. Bollinger Bands
B. Moving Average
C. Opinion polls

45. The price of a particular security has been dropping down. Which of the below would be most probable to
have been evident between that initial trend and a period where the price of the security is still dropping
more down?

A. Double top
B. Head and shoulder pattern
C. Triangle

46. Which of the below is most expected to be a problem when analyzing the longer cycle periods, such as K-
Waves or the presidential cycle effect?

A. Too little data
B. Too much data
C. Incomplete data

47. Which of the below does not signify a price-based indicator?

A. Relative strength index
B. Moving average
C. Bollinger bands

48. Which of the below are least expected to be perceived as continuation patterns?

A. Flags and pennants
B. Rectangle patterns
C. Double tops and bottoms

49. When a share has risen in price over the day, the ‘candle’ on its candlestick chart will be:

A. Large
B. White
C. Dark

50. A security has an uptrend in place and then goes into a rectangle trading pattern. Technical trading theory
tells us that the possible movement after the breakout from the rectangle pattern is:

A. There are no consistent movements following rectangles
B. Continuing the uptrend
C. Reversing to a downtrend



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51. What is it likely to mean if a technical analyst says a share has good 'relative strength'?

A. The ratio of the price of a stock relative to a market index has an upward trend
B. There is more trading on the OTC market than there is on the NYSE
C. The ratio of the price of a stock relative to a market index has a downward trend

52. The point where technicians anticipate a considerable surge in the demand for a stock to occur is termed a:

A. resistance level
B. support level
C. break-even level

53. Which of the below is categorized as a reversal pattern?

A. Double top
B. Triangle
C. Rectangle

54. The CBOE Volatility Index (VIX) is often understood from a contrarian perspective in conjunction with trend,
pattern or oscillator tools. When these tools imply an oversold market and the VIX is at an extreme high, this
combination is possible to be seen as a:

A. neutral indicator
B. bearish indicator
C. bullish indicator

55. Which of the below best describes retracement in the situation of technical analysis?

A. The reversal in the movement of a security's price such that it is counter to the prevailing longer-term price
trend
B. A price range in which selling activity is sufficient to stop the rise in price of a security
C. The continuation of movement of a security's price such that it prevails to the longer-term price trend

56. A common flow of funds indicator is the Arms Index, also termed the TRIN. A value of less than 1 signifies:

A. There is more trading activity in rising stocks
B. There is more volume in declining stocks
C. The market is in balance

57. Suggesting to cycle theory, the type of cycle theory that approximations a ‘cycle’ in the Western markets being
around 54 years is named a:

A. Presidential cycle
B. Kondratieff Wave
C. Decennial Pattern

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SOLUTIONS - EDGE CHECKERS

Reading 13 – Technical Analysis

1. C Elliott’s wave theory was that the market moves up and down in waves, the size of which approaches
or resembles ratios in the Fibonacci sequence.

2. B Margin debt levels measure investors’ willingness to borrow funds to invest in securities. The other 2
are also sentiment indicators but are grounded on other theories.

3. C Those are the 2 categories of chart patterns. Resistance denotes to resistance lines on charts.

4. C The major cycles: Grand supercycle, supercycle, cycle, primary, intermediate, minor, minute, minuette
and subminuette.

5. C Support labels a situation where there is enough buying power to end a drop in the price. Where there
is enough selling power to stop a rise in price, it is named resistance. The other answer is incorrect,
there being enough selling activity could not stop a decline in price, it would exacerbate it.

6. C Technical traders think they can make money by utilizing the fact that the market is not efficient.

7. B Plotting a moving-average line with lower and upper lines that are at a set number of standard
deviations apart = Bollinger Band Plotting the average of the closing price of a security over a
specified number of periods = Moving Average

8. A The suitable time interval for data sampling can range, but usually the more volatile the data, the
more frequently the analysts would favor having samples taken.

9. C The advance-decline line is a running total of the daily advances less the declines on the NYSE. If the
advance-decline line and index move together, it indicates this movement is generally true across the
market. Nevertheless, if there is a divergence between the two, then this signals the market has hit a
peak or trough. This technique gauges the strength of market support for both minor and big
businesses, i.e., the breadth of the market.

10. B When the volume is increasing as prices are moving up or down, that rising volume is said to confirm
that trend – i.e. more people are prepared to buy at increased prices as it goes up, and vice versa if it’s
going down.

11. B The other two options - different countries and different sectors, characterize Intermarket analysis.
Different stocks in the same market are not looking at the difference between two markets; it is
looking inside one market.

12. A Most bonds trade OTC, and therefore volume is harder to attain for the bond market.

13. B The inverse head and shoulders pattern can act as a reversal pattern for a preceding downtrend.
Price Target = Neckline + (Neckline - Head) = $10,000 + ($10,000 - $6,500) = $13,500.

14. C A line chart is a simple line of the prices over some period, while a candlestick chart displays daily
opening and closing prices as well as daily fluctuation. Both of them display price movements. Volume
charts are independent and can be included on both (or neither).

15. A The stock’s price went down today, and the closing price was the lowest price of the day. The ‘wick’ on
a candle displays you the extreme prices (high and low) for the day. If the wick doesn’t come out of the
bottom of the candle, and the body is dark, that means the price went down over the day (dark body),
and the closing price was the lowest of the day. (No other lower price means no wick)

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16. A A descending triangle has low prices that shape a horizontal line and high prices that have lower and
lower highs, which fits this depiction.

17. B A downtrend line is created by drawing a line that joins the highs of a price chart. An uptrend line is
constructed by connecting lows (or increasing minimum prices).

18. A A rising or high volume shows a likely continuation of a current trend.

19. B When a security’s price is trending up, each high and low will be higher than the previous high and
low. Lower highs and lower lows describe a downtrend, and higher highs and lower lows describe a
higher volatility, but not necessarily an uptrend.

20. B The ‘measuring implication’ is the difference between the two trend lines, when a triangle pattern
starts to arise and is a good suggestion of the amplitude of the breakout when it happens.

21. A Another assumption is that the real shifts in supply and demand can be observed in market price
behavior.

22. A A downtrend line is drawn through all the prior highs of the trend period. An uptrend joins all the
prior lows over a period.

23. B By joining the lows in a price chart, we create an uptrend line.

24. B A price range in which selling activity is adequate to stop the rise in the price of a security defines
resistance. A price range in which buying activity is adequate to stop the decline in the price of a
security defines support.

25. A Reversal Patterns: Head and shoulders, Inverse head and shoulders, double tops and bottoms, Triple
tops and bottoms. Continuation patterns: Triangle patterns, Rectangle patterns, flags and pennants
(minor continuation pattern).

26. C Data on price and volume data is important to nearly all aspects of technical analysis.

27. A The Relative Strength Analysis only tells you how a stock is doing relative to its index. In this case, the
stock is underperforming the index, but might still be increasing – just less than the index. Similarly,
the price might be falling by more than the index.

28. A Bollinger bands create a band around the moving average, a set amount of standard deviations from
the moving average. The theory runs that the price of the security should remain within the bands, so
when the upper band is breached, the investor would sell and would buy when it hits the lower band.

29. A Relative strength index is a momentum oscillator, Bollinger bands are a price-based indicator and
flow of funds is another branch of indicator as well. Relative strength index is not to be muddled with
relative strength analysis which is a charting technique.

30. C A head and shoulders is a reversal pattern, so Kade is accurate. The general target price for a 'head
and shoulders' pattern is the neckline minus the amplitude of the head over the neckline, not the
shoulders.

31. C Technicians think humans are irrational and emotional, and that this can trigger markets not to be
efficient. Also, they think that people behave comparably in comparable situations.

32. B The short interest ratio is = to the amount of short interest / by average daily trading volume.

33. B Technical analysis comprises the use of more hard data (in the form of Price and Volume data) than
fundamental analysis, which has more assumptions and estimates. Both types of analysis are valid.

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34. B When a security has been on an upward trend for a while, it’s price has been rising, and thus is more
expected to be above its 20-day moving average.

35. C Intermarket analysis is grounded on the principle that all markets are interrelated and influence each
other. The use of relative strength analysis for groups of securities (bonds versus equity) to make
allocation decisions.

36. B When the market is going up, the waves are termed ‘impulse’ waves under Elliott Wave theory, and
there is 5. After that, there are 3 ‘corrective’ waves, giving an answer of three for this question.

37. C A ‘dead cross’ is when the short term moving average falls below a long-term moving average and is
usually a bearish sign.

38. C Declining volumes means that as price changes, less and less people are willing to trade, implying that
these traders will eventually dry up and the price will have to move the other way.

39. A Technical analysis relies on price and volume data; the other 2 would be more relevant for
fundamental analysis.

40. B Both statements are precise, Relative strength analysis is a ratio of the stock price to a relevant index,
and when the ratio increases (upward sloping line) then the stock is outperforming the index.

41. A The ARMS index is equal to: (Number of advancing issues/number of declining issues) / (volume of
advancing issues/volume of declining issues). This number will get bigger as more stocks are sold, so
numbers above 1 signify a negative day.

42. A The same would hold for resistance levels; once breached, they become support levels.

43. B The light or dark shading to the candlestick chart is a major distinction from the bar chart. On a Point
and Figure Chart, the horizontal axis represents the number of changes in price, not time.

44. C Moving average and Bollinger bands are both price-based indicators. Opinion polls are sentiment
indicator.

45. C The Triangle pattern is a continuation pattern, so is more probable to link a downtrend with another
downtrend. The other two are reversal patterns, so following a downtrend, it would have been more
likely that the price went into an uptrend.

46. A The problem with K-Waves (there have been four in US History) and presidential elections (there
have been 54) is that there isn’t an enormous data set.

47. A Price-based indicators: Moving average, Bollinger bands Momentum Oscillators: Rate of change
oscillator, relative strength index, stochastic oscillator, moving average convergence/divergence
oscillator (MACD).

48. C Reversal Patterns: Head and shoulders, Inverse head and shoulders, double tops and bottoms, Triple
tops and bottoms. Continuation patterns: Triangle patterns, Rectangle patterns, flags and pennants
(minor continuation pattern).

49. B A candle is made up of the body and the wick, and if the price of a security has risen, it will be white. If
the price falls, it will be dark. The body would be large if there was a large price change, but nothing in
the question suggests this.

50. B Rectangles are an example of a continuation pattern, so the most likely to happen following breakout
is a continuation of the uptrend.

51. A That is, the price of a stock is strengthening relative to the market as a whole.

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52. B Support level = the price where a stock appears cheap and attracts buyers. Resistance level = the price
where a stock appears expensive and initiates selling.

53. A A triangle and a rectangle are a continuation pattern; double top is a reversal pattern.

54. C The CBOE VIX is a measure of near-term market volatility. Since 2003, it has been calculated from
option prices on the stocks in the S&P 500.

55. A For example, during an uptrend where the price goes to higher highs and higher lows, the following
reversal of price to the higher low would be known as the retracement.

56. A The TRIN is a ratio of two ratios: (Number of advancing issues / number of declining issues) /
(volume of advancing issues / volume of declining issues) It is applied to a broad market like the S&P
500 to measure the relative extent to which money is moving into or out of rising and declining
stocks. Near 1 = Market in balance >1 = More volume in declining stocks

57. B Kondratieff was an economist who projected that Western Markets tended to have a cycle of 54 years,
very close to studies performed by other economists. Decennial Pattern is an analysis looking at each
year that ends with the same digit. The presidential cycle, obviously, revolves around the presidential
elections in the US and their effect on the market.

Study Session 3 – Quantitative Methods: Application

Reading 13 – Technical Analysis ©2019 Edge FIT