Principles and Tools of Technical Analysis5 min
Technical analysis assumes that market prices reflect all known information, including investor psychology, and that price trends and patterns persist and repeat. Unlike fundamental analysis, which seeks intrinsic value, technical analysis projects target prices based on market activity. Tools include various charts: line charts (closing prices), bar charts (OHLC), and candlestick charts (emphasizing the open-close relationship). Analysts use linear scales for standard price moves and logarithmic scales for exponential changes over the long term. Volume is crucial for confirming the strength of price moves.

Key Points

  • Three key principles: prices reflect all info, trends persist, patterns repeat.
  • Contrasts with fundamental analysis; focuses on market sentiment and supply/demand.
  • Chart types: Line, Bar, Candlestick.
  • Logarithmic scales are used for large percentage price ranges.
  • Volume analysis confirms price trends.
Trend Analysis and Chart Patterns6 min
Trends are defined by the direction of highs and lows. An uptrend has higher highs and higher lows; a downtrend has lower lows and lower highs. Trendlines act as support (uptrend) or resistance (downtrend). The 'change in polarity' principle states that breached support levels become resistance levels, and vice versa. Chart patterns classify expected future movements: Reversal patterns (e.g., Head and Shoulders, Double Tops) signal a trend change, while Continuation patterns (e.g., Triangles, Rectangles, Flags) signal a resumption of the trend. Analysts use the height of patterns to calculate price targets.

Key Points

  • Uptrend: Higher highs, higher lows.
  • Support vs. Resistance and Change in Polarity.
  • Reversal Patterns: Head and Shoulders, Double/Triple Tops/Bottoms.
  • Continuation Patterns: Triangles, Rectangles, Flags, Pennants.
  • Price targets are derived from pattern dimensions.
Technical Indicators6 min
Indicators help identify overbought/oversold conditions and trend strength. Price-based indicators include Moving Averages (Golden Cross = bullish, Dead Cross = bearish) and Bollinger Bands (volatility-based bands). Momentum oscillators, such as ROC, RSI, MACD, and Stochastic, oscillate within a range or around a center line. Divergence between an oscillator and price often signals a reversal. Sentiment indicators like the Put/Call Ratio, VIX, and Margin Debt provide insight into investor psychology, often used for contrarian trading signals.

Key Points

  • Moving Averages: Smoothing data; Crossovers signal trend changes.
  • Bollinger Bands: Standard deviation based; Squeeze signals volatility.
  • Oscillators: RSI (0-100), MACD (convergence/divergence), Stochastic.
  • Sentiment Indicators: Put/Call Ratio, VIX, Margin Debt.
  • Contrarian strategies trade against extreme sentiment.
Intermarket Analysis and Portfolio Management4 min
Intermarket analysis examines correlations between different asset classes (stocks, bonds, currencies, commodities) to identify broad market shifts. Relative strength analysis compares the performance of one asset against another or a benchmark; a rising line indicates outperformance. Technical analysis complements portfolio management in both top-down (identifying leading sectors/markets) and bottom-up (picking stocks with favorable technical setups) approaches.

Key Points

  • Intermarket analysis looks at relationships between asset classes.
  • Relative strength charts compare two assets.
  • Used in top-down asset allocation and bottom-up security selection.
  • Can identify sector rotation and market leadership.

Questions

Question 1

Which of the following is one of the three key principles upon which technical analysis is based?

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Question 2

Technical analysis primarily differs from fundamental analysis in that technical analysis:

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Question 3

In a candlestick chart, a shaded or filled body typically indicates that:

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Question 4

Which type of chart displays the high, low, and closing prices for each period as a vertical line with a point or dash on the right side?

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Question 5

An analyst observing a stock index that has increased exponentially over several decades would most likely use which type of scale on the vertical axis?

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Question 6

A market is defined as being in an uptrend if prices are consistently reaching:

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Question 7

The principle of 'change in polarity' in technical analysis refers to:

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Question 8

In a head-and-shoulders pattern, the 'neckline' connects:

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Question 9

A head-and-shoulders pattern has a neckline at $55 and a head at $80. If the price breaks down through the neckline, the projected price target is closest to:

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Question 10

Which of the following is considered a continuation pattern?

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Question 11

A 'golden cross' occurs when:

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Question 12

Bollinger bands are constructed by drawing lines a specific number of standard deviations above and below a:

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Question 13

In the context of Bollinger bands, a 'squeeze' refers to:

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Question 14

Which of the following is a momentum oscillator that is calculated as 100 times the difference between the latest closing price and the closing price n periods earlier?

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Question 15

An RSI value of greater than 70 typically indicates that a market is:

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Question 16

The MACD line is calculated as the difference between:

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Question 17

In the Stochastic oscillator, the '%K' line represents:

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Question 18

Divergence occurs when:

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Question 19

The Put/Call ratio is generally viewed as a contrarian indicator. An extremely high ratio suggests:

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Question 20

The Volatility Index (VIX) measures the volatility of options on which underlying index?

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Question 21

According to technical analysts, an increase in total margin debt outstanding suggests:

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Question 22

Intermarket analysis relies heavily on which type of chart to identify attractive asset classes?

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Question 23

In a relative strength chart comparing Asset A to Asset B, an increasing line indicates that:

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Question 24

Using technical analysis to identify markets and sectors that have outperformed others before making tactical asset allocation decisions is an example of:

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Question 25

A bottom-up approach to portfolio management using technical analysis typically begins with:

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Question 26

Which of the following chart types includes opening prices?

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Question 27

If a stock's price breaks through a resistance level, the principle of change in polarity suggests that:

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Question 28

Which pattern is generally considered a reversal pattern at the end of a downtrend?

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Question 29

A 'dead cross' is viewed as a sell signal and occurs when:

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Question 30

A 'contrarian strategy' using Bollinger bands would involve:

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Question 31

The MACD signal line is defined as:

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Question 32

Technical analysts believe that identifying patterns in trading prices and volumes is useful because:

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Question 33

Which of the following describes a 'support level'?

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Question 34

Which type of chart pattern typically implies a pause in the trend rather than a reversal?

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Question 35

In the Stochastic oscillator, the trading signal is often generated when:

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Question 36

A technical analyst would view a very high VIX level as a:

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Question 37

Volume charts are usually displayed:

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Question 38

An uptrend line on a chart connects the:

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Question 39

If a stock's price is 50 and the 200-day moving average is 45, the moving average acts as:

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Question 40

A 'triangle' pattern in technical analysis indicates:

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Question 41

Which technical indicator calculates the ratio of an asset's closing price to a benchmark value?

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Question 42

In the context of the RSI, a value of 20 would most likely indicate:

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Question 43

Which of the following is an advantage of technical analysis over fundamental analysis?

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Question 44

A technical analyst using a top-down approach would likely start by analyzing:

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Question 45

When the short-term moving average crosses below the long-term moving average, it is known as a:

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Question 46

Which indicator is calculated as the ratio of total price increases to total price decreases over a selected number of periods?

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Question 47

A 'double top' pattern is most accurately described as:

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Question 48

Technical analysis assumes that the efficient markets hypothesis:

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Question 49

Which of the following refers to a situation where an oscillator shows a different pattern than prices?

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Question 50

Which sentiment indicator is based on the volume of options trading?

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