1.

The oldest approach to common stock selection is:

A) fundamental analysis
B) technical analysis
C) random walk analysis
D) value analysis
Ans: B

2. 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.
Ans: C

3. Market data includes all of the following except:

A) number of shares traded.
B) earnings.
C) level of market indices.
D) stock price.
Ans: B

4. 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 volume.
D) price and technical indicators.
Ans: C

5. Conventional technical analysis emphasizes:

A) only the aggregate stock market.
B) either the aggregate stock market or individual stocks.
C) only individual stocks.
D) only corporate securities.
Ans: B

6. 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.
Ans: B

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 7. All of the following are assumptions made by technical analysts except:
A) Changes in trend are caused by shifts in supply and demand relationships.
B) Stock price movements are independent.
C) Security prices tend to move in trends.
D) Supply and demand of securities are determined by various factors.
Ans: B

8. 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.
Ans: C

9. 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.
Ans: A

10. 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 used.
B) time period.
C) weight to be used.
D) type of moving average to be constructed.
Ans: C

11. 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.
Ans: D

12. A principal weakness of the Dow Theory is:

A) its use of averages instead of indexes.
B) its attention to general market movements.

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C) that it pays too much attention to primary trends.
D) the many versions that are available.
Ans: D

13. 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.
Ans: C

14. Volume and specific calendar time are not considered important in a:
A) pie chart.
B) point and figure chart
C) bar chart.
D) histogram.
Ans: B

15. One rule of thumb is that a stock is attractive when the relative strength has improved
for at least ______ months.
A) 1
B) 2
C) 3
D) 4
Ans: D

16. Corrections are often followed by ________.

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

17. 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
Ans: D

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 18. Which of the following is a characteristic of the short interest ratio: It is:
A) calculated daily as well as weekly.
B) often interpreted without any additional information.
C) between 2 and 3 in recent times.
D) considered to be a measure of investor sentiment.
Ans: D

19. The advance-decline line:

A) measures the number of stocks hitting new highs and lows.
B) can be computed only on a daily basis.
C) can be interpreted without reference to any market index.
D) is sometimes referred to as the depth of the market.
Ans: D

20. 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-lotters.
Ans: A

21. 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.
Ans: C

22. 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
Ans: A

23. 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.

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Ans: B

24. A put/call ratio of .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.
Ans: B

25. Technicians that utilize the CBOE put/call ratio generally believe:
A) option investors are almost consistent losers.
B) option investors are almost consistent winners.
C) option investors are true technicians.
D) option investors possess inside information.
Ans: A

26. 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
Ans: B

27. 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) all of the above would indicate a market peak to a contrarian
Ans: C

28. Which of the following is not one of the tests of a technical trading rule?
A) Transaction and other costs
B) Consistency
C) Return
D) Risk
Ans: C

29. If an investor buys a stock when its price has increased 15 percent from its previous low,
the investor is employing:
A) a contrarian indicator.

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B) a filter rule.
C) a sentiment indicator.
D) relative strength analysis.
Ans: B

30. If a trading rule has been tried 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.
Ans: A

31. 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.
Ans: A

32. Technical analysis focuses on economic and political factors which are external to the
market itself.
A) True
B) False
Ans: B

33. Technical analysis focuses on timing and on the short run.

A) True
B) False
Ans: A

34. Technical analysts agree with the fundamental analysts regarding the usefulness of
accounting data.
A) True
B) False
Ans: B

35. The Dow theory is intended to forecast the start but not the duration of a primary
movement.
A) True

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B) False
Ans: A

36. A bar chart is the simplest type of chart used in technical analysis.
A) True
B) False
Ans: A

37. In light of its high success rate, the Dow theory is seldom criticized.
A) True
B) False
Ans: B

38. Relative strength analysis is popular because it is generally not subject to conflicting
interpretations.
A) True
B) False
Ans: B

39. If a trend exhibits support and resistance levels simultaneously that appear well defined,
the trendlines are referred to as channel lines.
A) True
B) False
Ans: A

40. Secondary movements are often termed technical "corrections.

A) True
B) False
Ans: A

41. The cash position of mutual funds is a contrarian indicator.

A) True
B) False
Ans: A

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

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Ans: A

43. A filter rule specifies a breakpoint for a stock or average and trades are made when the
price is greater than the filter.
A) True
B) False
Ans: A

44. Explain how profit taking and support levels are related.
Ans: The scenario is as follows: The stock price increases. Profit taking follows,
driving the price down. When investors see the price as low enough, they buy,
stopping the price from dropping further, thus establishing the support level.

45. How does a point-and-figure chart compress many price changes into a small space?
Ans: By recording only “significant” price changes, defined as $1 or $2 or more. Thus,
1 1
moves of 4 , 2 , and so forth are not recorded.

46. Explain three specific buy signals using a moving average.

Ans: (a) The price is above the moving average, moves toward the average but does not
penetrate it, then starts back up. (b) After a fall, the moving average flattens out.
The price penetrates the average from below. (c) The stock price falls below the
moving average while it is rising.

47. What are support and resistance levels?

Ans: If a stock price is falling, a support level is a price at which sufficient demand is
expected to materialize to keep the stock price from dropping further. If a stock
price is rising, a resistance level is a price at which sufficient supply is expected to
emerge to keep the price from rising any higher.

48. How is relative strength calculated and used?

Ans: The relative strength of a stock is a ratio of the stock's price to a market index,
industry index, or average price of the stock itself. If a stock is doing well relative
to the industry, for example, it is expected to continue to do so in the future. A
change in relative strength, however, if often followed by a change in the stock's
price trend. The relative strength of an industry to the market can be considered
as well as the relative strength of individual stocks.

49. 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?

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Ans: Short sales must be covered, which creates demand for the stock at some point in
the future.

50. 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?
Ans: The odd-lot theory asserts that one should do the opposite of odd-lot investors,
because they are usually wrong. Thus, if odd-lotters are selling, smart investors
should buy. Similarly, the mutual fund liquidity technique asserts that mutual
fund managers act like odd-lotters, buying when the should be selling and vice
versa. When the funds accumulate large amounts of cash, they apparently think
the market is going down, and they do not want to be holding all stocks. The
contrarians argue that the opposite will occur.

51. What four factors should be considered in testing technical trading rules?
Ans: Risk, transactions costs, consistency, and out-of-sample validity.

52. What is the advance-decline line? What does it tell the technician?
Ans: The net advance for a day is the number of stocks that advanced in price minus
the number that declined in price. It is also called the breadth of the market. The
advance-decline line must be used in conjunction with a market average, such as
the DJIA. If the advance-decline line and the index diverge, then the trend is near
an end, according to technical analysts.

53. Discuss the difference in beliefs about price adjustments toward equilibrium in technical
analysis and the Efficient Market Hypothesis.
Ans: Technical analysis depends on trends over time as prices adjust slowly toward
new equilibrium levels. The EMH is based on information being quickly and
completely reflected in security prices.

54. Which form of the Efficient Market Hypothesis addresses the information used in
technical analysis? Do studies of technical analysis methods tend to support or refute
the EMH?
Ans: The weak form EMH addresses market data. Studies tend to support EMH and
refute the predictive power of technical tools, though not all agree with the
findings. Apparently, technicians do not agree.

55. How can relative strength analysis be helpful in a top-down approach to security
analysis?
Ans: Analysts can use industry relative strength to identify industries that are

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outperforming the market, then use company relative strength to identify
companies that are outperforming the industry.

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