Chapter 9- Technical Analysis and Market Efficency

Question 1

Technical Analysis

Answer 1

• can give signs about what we should do with each investment (is it a buy or sell, should we sit tight and do nothing?) - the study of various forces at work in the marketplace and their affect on stock prices - done by chartists or technicians

Question 2

Chartists

Answer 2

• are looking for patterns of activity that can help you to predict what will happen next - create charts that measure each behavior - example; super bowl winner- market has risen 80% of the time when an old nfl team wins the Super Bowl - causal effects are questionable

Question 3

Technical vs Fundamental Analysis

Answer 3

• technicians say that their approach is superior becuase fundamentalists: - always arrive to late - only benefit from the dispersion of information - may miss adjustments due to changes in peoples, expectations, attitudes and behavior

Question 4

Technical Analysis Data Set/ Technical Indicators

Answer 4

• Past Price data charts - Trading Volume - Short Interest - Option Activity - Odd-Lot Training - Insider Trading

Question 5

Trading (Market) Volume

Answer 5

• pure supply and demand analysis for common stocks - strong market when volume goes up - weak market when volume goes down - how convinced are people that prices are attractive or not (level of conviction) ex. Black Friday after Thanksgiving

Question 6

Breadth of the Market

Answer 6

• looks at number of stock prices that go up (advances) versus the number of stock prices that go down - strong market when advances

Question 7

Advance Decline Line

Answer 7

• measures the difference between stocks closing higher and stocks closing lower than previous day - difference is plotted on graph to view trends - used as signal to buy or sell stocks - Bull Market when advances or outnumber declines - Bear Market when declines outnumber advances

Question 8

Short Interest

Answer 8

-looks at number of stocks that have been sold short at any given time - can give two different interpretations

Question 9

Measure of future demand for stock

Answer 9

-strong market when short sales are high since guarantees future stock sales to cover the short positions (be aware if there is a high volume of short sellers, can be negative bc its an indication that the stock is overpriced - short sellers must buy at some point, high volume of short sellers usually something might happen in the future

Question 10

Measure of present market optimisim or pessimism

Answer 10

• weak market when short sales are high since professional short sellers think stocks will decline

Question 11

Odd-Lot Training

Answer 11

• measures the volume of small traders - assumes that small traders make mistakes will do just the opposite of what should be done - panic and sell when market is low, speculate and buy when market is too high - Bull Market when odd-lot sales signifcantly outnumber odd-lot purchases - Bear Market when odd-purchases outnumber odd-lot sales

Question 12

New-Highs, New-Lows

Answer 12

• measure the difference between stocks reaching a 52 week high and stocks reaching a 52 week low - 10 day-moving average is plotted on graph to view trends -used as signal to buy or sell stocks - Bull Market when highs outnumber lows - Bear Market when lows outnumber highs - must follow trends

Question 13

The role of volume

Answer 13

• look at market volume or individual stock volume - may tell us how strong the feelings are - heavy volume indicates we can be more confident in the direction of the marke - light volume may indicate the market lacks conviction - low volume means that people are not convinced that price rise is warranted, sustainable - high volume means that people feel strongly that stock rise is worth more than it is selling for

Question 14

Charting

Answer 14

• shows visual summary of stock activity over time - used to spot developing trends

Question 15

Bar Chart

Answer 15

• look at figure 9.4 in text to view bar chart

Question 16

Point and Figure Charts

Answer 16

-chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that either consist of a series of stacked Xs or Os

Question 17

Channel with ressistance and support

Answer 17

example on investopedia

Question 18

Head and Shoulders chart

Answer 18

• Leave the market when chart reaches below “neck point”: looking for some kind of confirmation, dont want to buy too soon or sell too soon

Question 19

Double Top

Answer 19

• no head and shoulders becuase the stock peaks at two seperate points- sell when it reaches the neck