Deck 16: Technical Analysis

Question 1

Which of the following is a characteristic of the short interest ratio?

A) It is calculated daily as well as weekly.
B) It is often interpreted without any additional information.
C) It has had a value between 2 and 3 in recent times.
D) It is considered to be a measure of investor sentiment.

Answer 1

D

Question 2

The breadth of the market is typically measured by which of the following:

A) 200-day moving average.
B) 50-day moving average.
C) the put-call ratio.
D) the advance-decline line.

Answer 2

D

Question 3

One of the primary tools of a technical analyst is:

A) sell-side research.
B) buy-side research.
C) Value Line earnings estimates.
D) charts of stock price and volume.

Answer 3

D

Question 4

Which of the following is not one of the three major variables to be decided by the investor in order to construct a moving average?

A) Price to be used
B) Time period to be used
C) Weight to be used
D) Type of moving average to be constructed

Question 5

In order to have confirmation of a major market trend under the Dow Theory, the:

A) industrial and utility averages must confirm each other.
B) transportation and utility averages must confirm each other.
C) utility average must lead the transportation average.
D) transportation and industrial average must confirm each other.

Question 6

Which of the following is not an assumption made by technical analysts?

A) Changes in trend are caused by shifts in supply and demand relationships.
B) Stock price movements are independent of one another.
C) Security prices tend to move in trends.
D) Supply and demand of securities are determined by various factors.

Question 7

A support level is a price range:

A) at which a significant increase in demand for a stock is expected.
B) at which a significant increase in supply of a stock is expected.
C) below which a stock price cannot go.
D) above which a stock price cannot go.

Question 8

A high short interest ratio is generally interpreted as:

A) a bullish signal.
B) evidence of a downside breakout.
C) a bearish signal.
D) evidence of the presence of odd-lot individual investors.

Question 9

Technical analysis differs from fundamental analysis in that technical analysis:

A) is aimed at the market, while fundamental analysis is aimed at individual stocks.
B) is based on published market data and focuses on internal factors.
C) focuses on the long-term trends of production.
D) does not consider price and volume.

Question 10

One rule of thumb is that a stock is attractive when its relative strength has improved for at least:

A) 1 month.
B) 2 months.
C) 3 months.
D) 4 months.

Question 11

Volume and specific calendar time are not considered important in a:

A) logarithmic price and volume chart.
B) point and figure chart.
C) nominal price and volume chart.
D) moving average convergence and divergence chart.

Question 12

A period of correction is often followed by a period of:

A) channel lines.
B) momentum.
C) reversals.
D) consolidation.

Question 13

Technical analysis reflects the idea that stock prices:

A) move upward over time.
B) move inversely over time.
C) move in trends.
D) move randomly.

Question 14

The oldest approach to common stock selection is:

A) technical analysis.
B) fundamental analysis.
C) stochastic analysis.
D) value analysis.

Question 15

Technical analysis is sometimes called market or:

A) external analysis.
B) internal analysis.
C) stochastic analysis.
D) qualitative analysis.

Question 16

Which of the following is not true regarding the Dow Theory?

A) It is intended to forecast the start of a primary movement.
B) It does not forecast how long a movement will last.
C) It has a very high success rate.
D) It is subject to many criticisms.

Question 17

What do technical analysts believe is the best source of data to use in analyzing stocks?

A) Corporate earnings growth prospects
B) Insider buying and selling of shares
C) Current P/E ratios versus historical ratios
D) The market itself

Question 18

The two primary tools of a technical analyst are:

A) level of the market index and volume.
B) economic indicators and level of the market index.
C) price and earnings.
D) price and volume.

Question 19

Which of the following is true regarding the resistance level?

A) Resistance levels tend to develop due to profit taking.
B) It is the level at which a significant decrease in demand is expected.
C) It is the level at which a significant increase in supply is expected.
D) Resistance levels usually develop after a stock reaches a new low.

Question 20

What is usually shown at the bottom of a bar chart?

A) A point and figure chart
B) Advance/decline line
C) Closing price
D) Volume

Question 21

Which of the following indicates the market is at its peak, according to contrarians?

A) The short-interest ratio is low
B) The bearish sentiment index is around 20 percent
C) Mutual fund liquidity is low
D) The number of stocks hitting all-time highs is low

Question 22

Which of the following statements about the put/call ratio is most accurate?

A) A negative ratio is bullish.
B) Investors interpret a ratio greater than 1 to be a bearish indicator.
C) Investors interpret a relatively low ratio to be a bearish indicator.
D) Investors interpret a relatively high ratio to be a bearish indicator.

Question 23

Technical analysis focuses on timing and on the short run.

Question 24

In a candlestick chart, what does it mean if the candlestick is shaded?

A) It is a bearish indicator.
B) It is a bullish indicator.
C) It means the stock's closing price was above its opening price.
D) It means the stock's opening price was above its closing price.

Question 25

Which of the following is not one of the factors to consider in performing a valid test of a technical trading rule?

A) The transaction and other costs incurred by the rule.
B) The consistency of performance from the rule.
C) The holding period implied by the rule.
D) The risk inherent in the rule.

Question 26

Which of the following is not a contrary trading rule?

A) Relative strength ratio
B) Investment advisory opinions
C) Mutual fund liquidity positions
D) Put/call ratio

Question 27

Assume an individual writes down Hs and Ts to simulate 100 coin flips. On average, how will this series appear relative to the result of 100 actual coin flips? Relative to the actual coin flips, the simulated series will:

A) contain too many runs with too much length per run.
B) contain too many runs with not enough length per run.
C) contain too few runs with too much length per run.
D) contain too few runs with not enough length per run.

Question 28

Technicians that utilize the CBOE put/call ratio generally believe:

A) option investors tend to be losers.
B) option investors tend to be winners.
C) option investors are true technicians.
D) option investors possess inside information.

Question 29

If an investor buys a stock when its price has increased 2 percent from its previous price, the investor is employing:

A) a contrarian indicator.
B) a filter rule.
C) a sentiment indicator.
D) relative strength analysis.

Question 30

If a trading rule has been tested on data other than that used to produce the rule and found to be accurate, this is known as:

A) consistency.
B) relative strength.
C) out-of-sample validity.
D) a filter rule.

Question 31

Which of the following is generally viewed as a bearish indicator for a stock?

A) It has a relatively high short-interest ratio.
B) Its 50-day moving average price has penetrated the 200-day average from above.
C) Following a price drop, the price penetrates the moving average from below.
D) It has an increasing relative strength ratio.

Question 32

Historical tests of filter rules indicate that:

A) several filters were profitable before commissions, but not after.
B) several filters were profitable before and after commissions.
C) no filters were profitable even before commissions.
D) all filters were profitable before commissions, but not after.

Question 33

Conclusions about technical analysis suggest that:

A) it is difficult to justify technical analysis.
B) it has been found to be completely deficient.
C) stock price movements repeat themselves constantly.
D) there is complete agreement about the interpretation of technical signals.

Question 34

The Dow Theory is intended to forecast the start but not the duration of a primary movement.

Question 35

The short interest ratio is found by dividing the number of shares sold short by the average:

A) number of shares outstanding in the market.
B) daily volume of trading on the exchange.
C) number of stocks reaching new lows.
D) daily number of stocks bought long.

Question 36

A put/call ratio of 0.70 indicates:

A) puts have a cost 70% less than the cost of calls.
B) there are 7 puts purchased for every one call purchased.
C) there are 70% more puts purchased than calls.
D) there are 7 puts purchased for every 10 calls purchased.

Question 37

Technical analysis utilizes a top-down, fundamental approach to common stock analysis.

Question 38

Which of the following would be considered a strong bearish signal?

A) High mutual fund liquidity
B) Bullish advisory opinion
C) Low short interest ratio
D) Bearish advisory opinion

Question 39

A daily accumulation of stocks advancing or declining is used in:

A) volume of trading analysis.
B) relative strength analysis.
C) breadth of market analysis.
D) short interest analysis.

Question 40

Technical analysts agree with fundamental analysts regarding the usefulness of accounting data.

Question 41

The bearish-sentiment index is calculated as the ratio of advisory services that are bearish to the total number with an opinion.

Question 42

Secondary movements are often termed technical corrections.

Question 43

How does a point-and-figure chart compress many price changes into a small space?

Question 44

A put/call ratio greater than the typical upper limit would be interpreted as a bullish signal by the contrarians.

Question 45

A bar chart is the simplest type of chart used in technical analysis.

Question 46

A filter rule specifies a breakpoint for a stock or average and trades are made when the price move is greater than the filter.

Question 47

Institutional investors are often considered to have the "smart money," while small, individual investors are not so well informed about the market. Which two sentiment indicators treat both institutions and individuals alike?

Question 48

How is relative strength calculated and used?

Question 49

The cash position of mutual funds is a contrarian indicator.

Question 50

Explain three specific buy signals using a moving average.

Question 51

What are support and resistance levels?

Question 52

Explain how profit taking and support levels are related.

Question 53

A head and shoulders pattern is generally interpreted as a bearish indicator by technical analysts.

Question 54

In the 1990s, many investment firms hired numerous fundamental analysts and very few technical analysts. Following the market downturns of 2000, 2001, and 2008, investment firms realized their mistake and hired far more technical analysts than fundamental analysts.

Question 55

Discuss the difference in beliefs about price adjustments toward equilibrium in technical analysis and the Efficient Market Hypothesis.

Question 56

Relative strength analysis is popular because it is generally not subject to conflicting interpretations.

Question 57

If a trend exhibits support and resistance levels simultaneously that appear well defined, the trend lines are referred to as channel lines.

Question 58

What four factors should be considered in testing technical trading rules?

Question 59

Investors who sell short expect to make money when the stock price goes down. How, then, can a high short-interest ratio be considered bullish?

Question 60

What is the advance-decline line? What does it tell the technician?

Question 61

Which forms of the Efficient Market Hypothesis addresses the information used in technical and fundamental analysis? Do studies of technical analysis methods tend to support or refute the EMH?

Question 62

How can relative strength analysis be helpful in a top-down approach to security analysis?

Question 63

Identify a widely reported measure of market data that is used by many investors as a rough indicator of a stock's trading range. Explain why the measure is reported.