Deck 15: Technical Analysis

Question 1

Technical analysts believe that security prices do not adjust rapidly.

Answer 1

True

Question 2

The confidence index increases as the yield on lower grade bonds decreases, everything else being constant.

Answer 2

True

Question 3

One of the potential disadvantages of technical analysis is that it can lead to investing too early, even before fundamental analysts do.

Answer 3

False

Question 4

A resistance level is the price range at which the technician would expect an increase in the demand of stock and a price reversal.

Question 5

The Confidence Index increases as the yield on lower grade bonds decreases, everything else being constant.

Question 6

Technicians consider a high short interest ratio to be bearish.

Question 7

The Dow theory contends that stock price movements are similar to the movement of tides, waves, and ripples.

Question 8

The T-Bill-Eurodollar yield spread widens during periods of international crisis.

Question 9

Two major classes of technicians include the contrarians and those who "follow the smart money".

Question 10

The use of trading rules requires a great deal of subjective judgment.

Question 11

If the aggregate market is rising, but the breadth index is declining, it is a bearish signal.

Question 12

If a technical trading rule is successful, more traders use it, causing the rule to become even more successful.

Question 13

An increase in debit balances means more investing by naive investors and would be a bearish indicator.

Question 14

A high put/call ratio indicates a pervasive bearish attitude by sophisticated investors so it is a bearish indicator.

Question 15

Contrary trading rules assert that investors tend to be wrong except at market peaks and troughs.

Question 16

The majority of technicians follows many trading rules and attempt to arrive at a consensus among their rules.

Question 17

Fundamentalists contend that past price movements will indicate future price movements.

Question 18

Most technicians feel that since price patterns repeat themselves, a single trading rule is sufficient.

Question 19

An increase in debit balances in brokerage accounts is viewed by technicians as a bullish sign.

Question 20

For technical trading rules to consistently generate superior returns, the market would have to be inefficient.

Question 21

When the 50 day MA line crosses the 200 day MA line from above it is considered a buy signal.

Question 22

Indicators that tell what smart investors are doing include

A)The put/call ratio.
B)Mutual fund cash position.
C)The Dow theory.
D)Short sales by specialists.
E)Head and tail indicator.

Question 23

According to contrary opinion technicians, the ratio of mutual funds cash to total assets ____ near troughs in the market cycle and ____ near peaks.

A)Level out, spikes
B)Remains low, remains high
C)Is published near, is not published
D)Increases, decreases
E)Decreases, increases

Question 24

The confidence index published by Barron's is the ratio of the average yield on 10 top grade corporate bonds to the

A)Average yield on 30 blue chip corporate stocks.
B)Average yield on 40 convertible corporate bonds.
C)Yield on U.S. Treasury bills.
D)Yield on the Dow Jones average of 40 bonds.
E)Yield on the Shearson Lehman Hutton Corporate Bond Index

Question 25

Analysts following what the smart, sophisticated investor is doing would examine

A)Mutual fund cash positions.
B)Debit balances in brokerage houses.
C)Investment advisory opinions.
D)Breadth of market.
E)Stocks above their 200 day moving average.

Question 26

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.

Question 27

Empirical analysis suggests that trigger points for trading rules are relatively stable over time.

Question 28

A support level is the price range at which the technician would expect an increase in the supply of stock and a price reversal.

Question 29

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.

Question 30

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.

Question 31

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.

Question 32

The cumulative number of shares that have been sold short by investors and not covered is called

A)Margin interest.
B)Short interest.
C)Short ratio.
D)Short/long ratio.
E)Naked short ratio.

Question 33

A rise in the Confidence Index published by Barron's is an indication investors will purchase more lower-quality bonds.

Question 34

The relative strength ratio for a stock can be computed by dividing the value of the S&P 500 stock index by the price of a stock.

Question 35

The following are classified as contrary trading rules, except the

A)Odd lot short sales.
B)Investment advisory opinions.
C)Relative OTC volume.
D)CBOE put/call ratio.
E)Confidence index.

Question 36

Candlestick charts indicate the price change from open to close by shading whether the market went down or up for the day.

Question 37

If 10 percent of the stocks are selling above their 200 day moving average, the market is considered to be oversold.

Question 38

The breadth of the market measures the daily volume for a particular market.

Question 39

If the 50-day moving average line crosses the 200-day moving average line from below on good volume, this would be a bullish signal.

Question 40

Which of the following is not considered 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 that 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.

Question 41

A divergence between an increase in a stock market series and the rest of the stock market can be detected using

A)Debit balances in brokerage accounts
B)Short interest
C)The advance-decline line
D)Confidence index
E)None of the above

Question 42

When ____ of stocks are trading above the 200-day moving average, the market is considered ____, and subject to a ____.

A)20%, oversold, negative correction
B)80%, overbought, negative correction
C)80%, oversold, positive correction
D)20%, overbought, positive correction
E)None of the above

Question 43

When the 50 day moving average crosses the 200 day moving average from ____ on ____ volume, this would be a ____ signal.

A)Above, low, bullish.
B)below, high, bearish.
C)below, low, bullish.
D)above, high, bullish.
E)below, high, bullish.

Question 44

The ratio of OTC volume versus NYSE volume is a measure of ____. This ratio typically ____ at a market ____.

A)Speculative activity, bottoms, peak.
B)Hedging activity, bottoms, peak.
C)Speculative activity, peaks, peak
D)Speculative activity, bottoms, bottoms.
E)None of the above.

Question 45

In examining the properties of world market currencies or the 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.

Question 46

A price range at which technicians feel that a significant increase in the price of the stock will be resisted is referred to as

A)Supply threshold.
B)Support level.
C)Short interest level.
D)Advancement level.
E)Resistance level.

Question 47

A technical analyst might use credit balances in brokerage accounts as follows:

A)Sell stock when credit balances rise
B)Buy stock when credit balances rise
C)Sell stock when credit balances decline
D)b and c
E)None of the above

Question 48

Technicians believe, when the relative strength index is stable or ____, during a ____ market, the stock should do well during a ____ market.

A)Decreases, bull, bear.
B)Increases, bear, bull.
C)Decreases, bear, bull.
D)Increases, bull, bear.
E)None of the above.

Question 49

A technical analyst might consider the following a bearish signal.

A)The percentage of speculators in stock index futures exceeds 70%.
B)The percentage of speculators in stock index futures exceeds 30%.
C)The percentage of speculators in stock index futures falls to 30%.
D)The percentage of speculators in stock index futures remains flat.
E)None of the above.

Question 50

A technical analyst might use mutual fund cash positions as follows:

A)Sell stock when cash levels are low
B)Buy stock when cash levels are low
C)Sell stock when cash levels are high
D)b and c
E)a and b

Question 51

A narrowing of the T-bill-Eurodollar and ____ signal, because ____.

A)Bearish, it signals falling investor confidence
B)Bullish, it signal rising investor confidence
C)Bearish, it signals a flight to quality
D)Bullish, it signals a flight to quality
E)b and d

Question 52

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)Reverse trend.
D)Meet a resistance level.
E)Form head and shoulder patterns.

Question 53

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

Question 54

The ratio of the price of a stock or an industry group to the value of the market index is called the

A)Company to market ratio.
B)Composite stock ratio.
C)Relational proportion ratio.
D)Stock to market ratio.
E)Relative strength ratio.

Question 55

A technical analyst might consider the following as a bearish signal

A)Investment advisory opinion is bearish
B)Investment advisory opinion is bullish
C)CBOE put-call ratio above 0.60
D)CBOE put-call ratio below 0.40
E)b and d

Question 56

____ charts show time series of price while ____ charts only reflect change regardless of time.

A)Relative strength, bar
B)Relative strength, advance/decline
C)Point and bar, figure
D)Bar, point and figure
E)Bar, multiple indicator

Question 57

A price range at which technicians would expect a substantial increase in the demand for a stock is called

A)Demand threshold.
B)Resistance level.
C)Support level.
D)Resistance limit.
E)Technical restraint.

Question 58

To a technician that believed in the importance of volume, a bullish signal would occur when

A)Prices increase on light volume.
B)Prices decrease on light volume.
C)Prices increase on heavy volume.
D)Prices decrease on heavy volume.
E)None of the above.

Question 59

A type of charting which normally disregards both time and volume is the

A)Bar chart.
B)Point and figure chart.
C)Pie chart.
D)Histogram.
E)A linear regression graph.

Question 60

Advances and declines are associated with market

A)Efficiency.
B)Position.
C)Diffusion.
D)Depth.
E)Breadth.

Question 61

The market is considered to be overbought and subject to a negative correction when more than

A)60% of the stocks are selling above their 90 day average.
B)70% of the stocks are selling above their 100 day average.
C)80% of the stocks are selling above their 200 day average.
D)70% of the stocks are selling above their 150 day average.
E)90% of the stocks are selling above their 150 day average.

Question 62

A chart used to show only significant price changes, regardless of their timing, is the

A)Candlestick chart
B)Multiple indicator chart
C)Bar chart
D)Point-and-figure chart
E)Point-and-click chart

Question 63

A technical analyst would consider a put call ratio of ____ as a bearish indicator.

A)30 percent
B)40 percent
C)50 percent
D)60 percent
E)70 percent

Question 64

The relative strength index for a stock is equal to the price of the stock

A)Divided by the value of a stock-market index.
B)Multiplied by the value of a stock-market index.
C)Divided by the value of a group of industry stocks.
D)Multiplied by an industry peer group and divided by a market index.
E)Divided by the 30 day moving average of prior stock movements.

Question 65

When the 50-day moving average crosses the 200-day moving average from below on good volume

A)This would be a bearish indicator because it signals a change to a negative trend.
B)This would be a bullish indicator because it signals a change to a negative trend.
C)This would be a bullish indicator because it signals a change to a positive trend.
D)This would be a bearish indicator because it signals a change to a positive trend.
E)None of the above.

Question 66

According to technical analysts using mutual fund cash positions to guide investment decisions

A)A low cash ratio position is a bullish indicator.
B)A high cash position is a bullish indicator.
C)A high cash position is a bearish indicator.
D)A low cash position is neither bearish nor bullish.
E)None of the above.

Question 67

Which of the following assumptions regarding price movements summarized by Levy (1966) are controversial?

A)Supply and demand determine the market value of any good or service.
B)Supply and demand are governed by numerous rational and irrational factors.
C)The prices for individual securities and the overall value of the market tend to move in trends.
D)All of the above assumptions are controversial.
E)None of the above assumptions are controversial.

Question 68

Exhibit 15.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Daily closings for the Dow Jones Industrial Average are given in the table below. $$\begin{array} { c r } \text { Day } & \text { Price } \\\hline 1 & 9867 \\2 & 10025 \\3 & 10524 \\4 & 10210 \\5 & 10104 \\6 & 9925\end{array}$$

-Refer to Exhibit 15.1. Calculate a 4-day moving average for day 5.

A)10,102.3
B)9905.6
C)9875.4
D)10,215.7
E)10,157.6

Question 69

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

Question 70

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)

Question 71

Exhibit 15.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The table below provides five days of trade data. $$\begin{array}{l}\begin{array} { c c c c c } &\text { Issues }\\\text { Day } & \text { Traded } & \text { Advances } & \text { Declines } & \text { Unchanged } \\\hline 1 & 22456 & 15698 & 6158 & 600 \\2 & 23013 & 14560 & 8210 & 243 \\3 & 23124 & 10324 & 12678 & 122 \\4 & 22678 & 9867 & 11567 & 1244 \\5 & 21897 & 8678 & 12561 & 658\end{array}\end{array}$$

-Refer to Exhibit 15.2. Calculate the net advance-decline for day 5.

A)-3,883
B)9,540
C)-2,354
D)13,356
E)7,953

Question 72

Technicians using the confidence index published by Barrons to make investment decisions

A)Believe the ratio is a bullish indicator because during periods of high confidence investors will invest in higher quality bonds.
B)Believe the ratio is a bearish indicator because during periods of high confidence investors will invest in higher quality bonds.
C)Believe the ration is a bearish indicator because during periods of high confidence investors will invest in lower quality bonds.
D)Believe the ration is a bullish indicator because during periods of high confidence investors will invest in lower quality bonds.
E)None of the above.

Question 73

A contrary opinion technician would buy stock when mutual funds

A)Are at the market peak
B)Are fully invested
C)Have a cash ratio approaching 4 percent
D)Have a cash ratio approaching 11 percent
E)None of the above

Question 74

Which of the following is not an advantage of technical analysis identified by technicians?

A)Fundamental analysis depends heavily on financial accounting statements.
B)The majority of investors cannot consistently process new information correctly.
C)Fundamental analysis may not time the investment properly when trading under- or over-valued securities.
D)The majority of investors cannot process new information quickly enough.
E)All of the above are advantages identified by technicians.

Question 75

Based on the daily closings for the Dow Jones Industrial Average given in the table below, calculate a four-day moving average for Day 4. $$\begin{array} { c c } \text { Day } & \text { Price } \\\hline 1 & 10500 \\2 & 10025 \\3 & 10125 \\4 & 10210\end{array}$$

A)10,500
B)10,210
C)10,215
D)10,000
E)11,000

Question 76

Exhibit 15.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Daily closings for the Dow Jones Industrial Average are given in the table below. $$\begin{array} { c r } \text { Day } & \text { Price } \\\hline 1 & 9867 \\2 & 10025 \\3 & 10524 \\4 & 10210 \\5 & 10104 \\6 & 9925\end{array}$$

-Refer to Exhibit 15.1. Calculate a 5-day moving average for day 6.

A)10,102.3
B)9905.6
C)9875.4
D)10,215.7
E)10,157.6

Question 77

An advantage of technical analysis over fundamental analysis is technical analysis

A)Has an increased amount of data that allows the analyst to process the information
B)Can more thoroughly investigate accounting information
C)Adjusts for differences in GAAP accounting procedures across the industry
D)Can capture non-quantifiable variables such as psychological factors
E)None of the above

Question 78

A technical analyst would consider the following a strong buy signal:

A)A graph of declining prices ends in a trough followed by an upward trend that breaks through the declining trend channel.
B)A graph of increasing prices ends in a peak followed by a downward trend that breaks through the rising trend channel.
C)A graph begins to trade in a flat trend after it breaks out of its rising trend channel
D)A graph begins to trade in a declining trend after it breaks out of its flat trend channel
E)None of the above

Question 79

Which of the following is not considered a contrary trading rules?

A)Futures traders bullish on stock index futures
B)Investment advisory opinions
C)Credit balance in brokerage accounts
D)CBOE put/call ratio
E)Confidence index

Question 80

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? $$\begin{array}{l}\begin{array} { c c c c c } &\text { Issues }\\\text { Day } & \text { Traded } & \text { Advances } & \text { Declines } & \text { Unchanged } \\\hline 1 & 8540 & 6500 & 1500 & 540 \\2 & 7535 & 5500 & 1230 & 805 \\3 & 6545 & 4554 & 1324 & 667\end{array}\end{array}$$

A)5,000
B)9,270
C)12,500
D)13,250
E)11,667