CHAPTER 16
TECHNICAL ANALYSIS
TRUE/FALSE QUESTIONS
(t) 1 Technical analysts contend that past price movements will indicate future price movements.
(f) 2 Both technicians and non-technicians believe that market prices are determined by supply and demand, but only technicians believe that irrational factors influence supply and demand.
(t) 3 Technicians believe that changes in trends can be detected by analyzing the action of the market itself.
(t) 4 For technical trading rules to consistently generate superior returns, the market would have to be inefficient.
(f) 5 One of the potential disadvantages of technical analysis is that it can lead to investing too early, even before fundamental analysts.
(f) 6 One of the disadvantages of technical analysis is that technicians do not have to depend upon financial statements.
(f) 7 One of the advantages of technical trading rules is that many of them provide specific values related to trading rules and these specific values are constant and stable.
(f) 8 The use of trading rules does not requires a great deal of subjective judgment.
(f) 9 Most technicians feel that since price patterns repeat themselves, a single trading rule is sufficient.
(t) 10 When a stock breaks out of a declining trend channel on heavy trading volume, that is a buy point.
(t) 11 When a stock has been trading in a flat trend channel and breaks out on the upside, this is considered a buying opportunity by technicians.
(t) 12 Contrary trading rules assert that the majority of investors are wrong most of the time or at least peaks and troughs.
(f) 13 Technicians would be bullish when the "bearish sentiment index" declines below 20 percent.
(f) 14 The accepted measure of speculative trading activity is the ratio of AMEX volume to NYSE volume.
(f) 15 A high put/call ratio indicates a pervasive bearish attitude by sophisticated investors so it is a bearish indicator.
(t) 16 The Confidence Index increases as the yield on lower grade bonds decreases, everything else being constant.
(f) 17 An increase in debit balances means more investing by naive investors and would be a bearish indicator.
(t) 18 If the aggregate market is rising, but the breadth index is declining, it is a bearish signal.
(t) 19 The short interest ratio is the outstanding short interest divided by the average daily volume on the exchange.
(t) 20 Technicians consider a high short-interest ratio to be bullish.
MULTIPLE CHOICE QUESTIONS
(b) 1 Technicians believe, when the relative strength
index is stable or , during a market, the stock should do well during a market.
Decreases, bull, bear.
Increases, bear, bull.
Decreases, bear, bull.
Increases, bull, bear.
None of the above.
(e) 2 When the 50 day moving average crosses the 200 day
moving average from on volume, this would be a signal.
Above, low, bullish.
below, high, bearish.
below, low, bullish.
above, high, bullish.
below, high, bullish.
(b) 3 When of stocks are trading above the 200-day
moving average, the market is considered , and subject to a
20%, oversold, negative correction
80%, overbought, negative correction
80%, oversold, positive correction
20%, overbought, positive correction
None of the above
(c) 4 A divergence between an increase in a stock market
series and the rest of the stock market can be detected using
Debit balances in brokerage accounts
Short interest
The advance-decline line
Confidence index
None of the above
(b) 5 A narrowing of the T-bill-Eurodollar
and signal, because
Bearish, it signals falling investor confidence
Bullish, it signal rising investor confidence
Bearish, it signals a flight to quality
Bullish, it signals a flight to quality
b) and d)
(e) 6 A technical analyst might consider the following
as a bearish signal
Investment advisory opinion is bearish
Investment advisory opinion is bullish
CBOE put-call ratio above
CBOE put-call ratio below
b) and d)
(d) 7 A technical analyst might use credit balances in
brokerage accounts as follows
Sell stock when credit balances rise
Buy stock when credit balances rise
Sell stock when credit balances decline
b) and c)
None of the above
(a) 8 A technical analyst might use mutual fund cash
positions as follows
Sell stock when cash levels are low
Buy stock when cash levels are low
Sell stock when cash levels are high
b) and c)
a) and b)
(b) 9 Technical analysis differs from fundamental
analysis in that
a) technical analysts contend that in-depth
assessments of basic aggregate market,
industry, and company performance is necessary;
past price movements indicate future price
movements.
b) technical analysts believe the market value of
common stocks is determined by the interaction
of supply and demand.
c) technical analysts argue that the market
constantly weighs rational and irrational
factors and that both of these affect price.
d) technical analysts depend far more heavily on
objective, data-based approaches than the
fundamentalists do.
e) technical analysts hold that the price of a
security is determined by an expected return
risk.
(d) 10 Which of the following is not an assumption of technical analysis?
a) Market value is determined solely by supply and
demand.
b) Supply and demand are governed by both rational
and irrational factors.
c) Security prices tend to move in trends which
persist for an appreciable length of time.
d) Stock prices follow a random walk.
e) Changes in trend are caused by the shifts in
supply and demand relationships.
(c) 11 For technical trading rules to generate returns that are superior to a buy-and-hold strategy, net of transaction costs, the market would have to be
a) Rising.
b) Falling.
c) Inefficient.
d) Overvalued.
e) Undervalued.
(b) 12 Technical analysts feel that financial accounting statements lack information, or report it in a way that makes comparisons difficult. Which of the following does not constitute a problem?
a) Detailed information concerning sales and
expenses by product line.
b) Statements of change in financial position.
c) Alternative ways of reporting expenses.
d) Alternative ways of reporting assets and
liabilities.
e) The availability of psychological and
nonquantitative variables.
(c) 13 Which of the following is not a technical trading rule category?
a) Contrary-opinion rules
b) Follow the smart money rules
c) Anti-fundamental and anti-portfolio approaches
d) Stock price and volume techniques
e) Other market environment indicators
(e) 14 Which of the following is not considered a contrary trading rules?
a) Odd-lot short-sales
b) Investment advisory opinions
c) Credit balance in brokerage accounts
d) CBOE put/call ratio
e) Confidence index
(a) 15 Which of the following is not a true statement regarding the mutual fund cash position?
a) It is defined as the fund's cash position as
a percent of the fund's equity.
b) The range of each position has historically
been from 8 percent to 13 percent, but the
range has tended to increase during the recent
time periods.
c) Contrary opinion technicians consider the
mutual funds like small investors and trade
against them at peaks and troughs.
d) Many technicians contend a high fund cash
balance is bullish because it is a pool of
potential buying power.
e) The empirical studies on this ratio have not
been very supportive of the rule.
(b) 16 Analysts following what the smart, sophisticated investor is doing would examine the
a) OTC versus NYSE volume.
b) Debit balances in brokerage houses.
c) Investment advisory opinions.
d) Breadth of market.
e) Stocks above their 200-day moving average.
(d) 17 The confidence index published by Barron's is the ratio of the average yield on the 10 top grade corporate bonds to the
a) Average dividend yield on the DJIA.
b) Average yield on 40 convertible corporate
bonds.
c) Yield on . Treasury Bonds.
d) Yield on the Dow Jones average of 40 bonds.
e) Yield on the Lehman Brothers Corporate Bond
Index.
(c) 18 The short interest ratio is the ratio between the number of shares sold short and not covered, and the
a) Average number of stocks reaching new highs.
b) Average daily number of stocks that increased
in value.
c) Average daily volume of trading on the
exchange.
d) Average monthly volume of trading on the
exchange.
e) Average number of shares outstanding in those
stocks.
(a) 19 Technicians believe that an industry or stock that is outperforming the market will tend to
a) Continue to outperform the market.
b) Return to normal.
c) Underperform the market in the future.
d) Meet a resistance level.
e) Form head and shoulder patterns.
(d) 20 The Dow Theory describes stock prices as moving in trends analogous to the movement of water. Which of the following statements is not true?
a) Major trends resemble tides.
b) Intermediate trends resemble waves.
c) Short-run movements are like ripples.
d) Waves are the most important.
e) None of the above (that is, all are true
statements)
(d) 21 Which of the following statements is true?
a) At a support level, the technician would expect
an increase in the demand for a stock.
b) At a resistance level, the technician would
expect an increase in the demand for a stock.
c) At a resistance level, the technician would
expect any price increase to reverse abruptly.
d) Choices a and c
e) All of the above
(c) 22 A resistance level differs from a support level in
that
a) at a resistance level most investors would hold
stock until the price improves; at a support
level a stock becomes overvalued and investor
interest is likely to decrease.
b) at a resistance level the analyst would expect
a substantial increase in the demand for a
stock; at a support level the analyst would
expect a substantial decrease in the demand for
a stock.
c) at a resistance level most investors would sell
a stock; at a support level most investors
would be willing to purchase a stock.
d) Choices a and b.
e) None of the above.
(b) 23 A type of charting which normally disregards both
time and volume is the .
a) Bar chart
b) Point-and-figure chart
c) Logarithmic chart
d) Time series chart
e) A relative strength graph
(a) 24 In examining spreads between currencies, an
analyst is most likely to use time series
properties to determine all the following except
a) Volatility.
b) Overbought condition.
c) Resistance-support levels.
d) Trend.
e) An oversold condition.
MULTIPLE CHOICE PROBLEMS
(c) 1 Assume the following daily closings for the Dow Jones Industrial Average: Day 1: 9020; Day 2: 9000; Day 3: 9050; and Day 4: 9030. Calculate a four-day moving average for Day 4.
a) 9000
b) 9010
c) 9025
d) 9040
e) 9050
(c) 2 Given the following three days of data, compute the daily net advance-decline line and cumulative advance-decline line for each day. What is the final value at the end of the third day?
Day 1 2 3
Issues Traded 2540 2535 2545
Advances 1840 1100 1800
Declines 600 1230 595
Unchanged 100 205 150
a) 1205
b) 1240
c) 2315
d) 2575
e) none of the above
CHAPTER 16
ANSWERS TO MULTIPLE CHOICE PROBLEMS
1 Day 4 = (9020 + 9000 + 9050 + 9030)/4 = 9025
2 Day 1 2 3
Net advances 1240 -130 1205
(advances minus declines)
Cumulative net 1240 1110 2315
advances
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