Fundamental & Technical Analysis
Short Interest Theory
Since a short seller must, at some future time, become a buyer to cover his short, this cushion of buyers will support a declining market & accelerate a rising one. ● Therefore, a small amount of short interest makes a technically weak market & a large amount of short interest makes a technically strong market.
The Dow Jones Industrial Average is the * it is price weighted
market price of 30 selected common stocks divided by a constant [not capitalization weighted]. ● It is also the narrowest sampling of stocks. ● It is considered to be an indication of market direction.
Consolidating
means that the market is moving sideways.
The broadest index is the Wilshire which * it is capitalization weighted.
measures the dollar value of all the shares of more than the top 5,000 publicly traded stocks in the U.S.
Charting - A Selling Climax -
normally occurs at the end of a bear market. ● It is a sharp drop in stock prices accompanied by increasing volume after a lengthy market decline.
The NYSE Composite Index is affected by
price changes of all listed common stocks [common stocks only]. ● The largest component of this index is industrials [Dow Jones Industrial].
Breadth of the Market
refers to the percentage of stocks participating in a particular market move. ● Charting the advance vs. declines in stock prices is included in the "breath."
Random Walk Theory
says that past prices movements cannot be relied upon to predict future price movements. ● It says that the stock market is perfectly efficient & reacts instantly to new information. ● It says that it's futile to try to outperform the market.
The Dow Jones Composite Average contains
65 common stocks from the industrial, transportation & utility indices.
The Value Line Index is a * it is capitalization weighted.
wider sampling of stocks than the NYSE Composite Index, Standard & Poor's Composite Index, or the Dow Jones Industrial Average.
Charting - A Saucer Chart -
A Saucer Chart pattern is a pattern that looks like a "saucer" & indicates that the security formed a bottom & is now moving up & is "Bullish".
Charting - Upside-Down Saucer Chart -
An Upside-Down Saucer Chart pattern indicates that the security has formed a top & is now moving down & is "Bearish".
The stock market indicator that measures 30 actively traded Blue Chip stocks is called: ● The Dow Jones Industrial Average ● The Dow Jones Composite Average ● The Wilshire Index ● The Standard & Poor's Index
Answer: The Dow Jones Industrial Average Explanation: The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded Blue Chip stocks. It is the oldest and the most quoted market indicator.
Market momentum refers to: ● Disintermediation ● Money supply ● The degrees of strength or weakness in various market groups. ● The impact of fiscal & monetary policies on the market.
Answer: The degree of strength or weakness in various industry groups. Explanation: Market momentum is the tendency of a security to continue movement in a single direction. Momentum is one of the most important factors in trend analysis of the stock prices. It also indicates the degree of strength or weakness for industry groups.
A technical analyst/chartist would interpret an inverted head-and-shoulder formation as: ● The reversal of an upward trend ● Bearish ● The reversal of a downward trend ● Neutural
Answer: The reversal of a downward trend Explanation: A head-and-shoulder pattern signals the reversal of a trend. A head-and-shoulders top would signal that prices are falling. An inverted head-and-shoulders bottom would signal that prices are rising.
The advance-decline measurement is used to measure all of the following except: ● Market Momentum ● breadth of the market ● investor sentiment ● share turnover
Answer: share turnover Explanation: Advance/decline measurement measures price movement not shares movement or turnover.
Volume Theory
Trading volume is bullish when it is heavy on advances & light on declines. ● It is bearish if it is light on advances & heavy on declines.
A portfolio manager who is bearish would invest
in securities which are resistant to price declines.
Charting - A head & shoulders top formation
indicated a breakout on the downside from an upward trend [reversal of an upward trend].
Charting - A head & shoulders bottom or inverted formation
indicates a bullish trend & reversal of a downward move.
The Standard & Poor's Index of 500 Stocks is a * Benchmark for all performance. * it is capitalization weighted.
broad based index of 500 highly capitalized companies from all sectors including utilities, industrial, financial & transaction carefully followed by professional investors & is considered to be the measure of average market performance.
Program Trading is
defined as computer driven trading by institutions buying & selling certain stocks or an index on which options and/or futures are also traded. ● Program Trading does NOT consider Fundamental Analysis factors.
Market Sentiment
describes the bullish or bearish outlook or mood of investors.
Market Momentum
is a measure of the rate of acceleration of a price movement. ● It includes the degree of strength or weakness in various industry groups & the price & volume trends in the market.
Alpha Measurement -
is best described as a measure of the extent to which a stock's price will react to news or events that relate to a particular company, such as a change in the company's management.
Beta Measurement -
is best described as a measure of the volatility of a particular stock's price when compared to the market as a whole.
Fundamental Analysis
is concerned with a specific company & its factors.
Technical Analysis
is concerned with market price moves & trends.
Advance-Decline Ratio
is concerned with the number of stocks that advance in relation to the number of stocks that decline. ● It is a good measure of the strength of bull or bear market. ● The Advance / Decline measurement does not measure the number of shares that have been traded or "turned over."
Charting - The Support Level -
is the price at which a downward trend is expected to level off.
Charting - The Resistance Level -
is the price at which an upward trend is expected to level off. ● If a stock has traded between $20 & $35 for 2 or 3 & always sells off as it approaches $35, then the price of $35 would be referred to as the resistance level.
Beta Measurement Example:
● A portfolio with a Beta of 1 would be expected to move about the same as the market. ● A portfolio with a Beta of 0.8 would be expected to move less than the market. ● A portfolio with a Beta 1.3 would be expected to move more than the market.
In Fundamental Analysis of a security, the following factors would be examined by an analyst.
● Management ● Earnings ● Company outlook ● Company's annual report ● Price /Earnings Ratios
Theories of Technical analysis:
● Odd Lot Theory ● Advance-Decline Ratio ● Market Sentiment ● Breadth of the Market ● Market Momentum ● Short Interest Theory ● Volume Theory ● Random Walk Theory
Charting - ● From the chartist's point of view, once a trend line has been established, the stock tends to move in the same trend line. ● A head & shoulders top formation indicated a breakout on the downside from an upward trend [reversal of an upward trend]. ● A head & shoulders bottom or inverted formation indicates a bullish trend & reversal of a downward move. ● The support level is the price at which a downward trend is expected to level off.
● The Resistance Level is the price at which an upward trend is expected to level off. ● A selling climax normally occurs at the end of a bear market. It is a sharp drop in stock prices accompanied by increasing volume after a lengthy market decline. ● A Saucer Chart pattern is a pattern that looks like a "saucer" & indicates that the security formed a bottom & is now moving up & is "Bullish". ● An Upside-Down Saucer Chart pattern indicates that the security has formed a top & is now moving down & is "Bearish".
Technical Analysts would be concerned with supply & demand factors such as:
● Trading volume - the number of shares traded ● Moving averages of stock prices ● Advances & declines - ratio of advancing issues to declining issues ● Odd lot purchases & sales - for stock, trades of less than 100 shares ● Timing of purchases & sales - to try to predict price movements ● Support & resistance levels - floor or ceiling price levels shown on charts
Odd Lot Theory
● believes that odd lot investors are always wrong; ● therefore, buy when odd lot investors are selling & sell when odd lot investors are buying ● do the opposite of what odd lot investors are doing. ● an odd lot is when an investors buys or sells stock or trades of less than 100 shares of stock
Stock Market Indexes - Indexes are a market indicator which measures a group of stocks or bonds performance.
● the NYSE Composite Index ● Dow Jones Industrial Average ● Down Jones Composite Average ● Value Line Index ● Standard & Poor's Index of 500 Stocks ● Broadest Index is the Wilshire