Solutions for Chapter 10: Questions and Problems
CHAPTER 10
TECHNICAL ANALYSIS
Answers to Questions
1. The principal contention of technicians is that stock prices move in trends that persist for
2. Technicians expect trends in stock price behaviour because they believe that new
information that causes a change in the relationship between supply and demand does not
3. The problems encountered when doing a fundamental analysis of financial statements
are: (1) much of the information in financial statements is not useful; (2) there are
4. The disadvantages of technical analysis are: (1) past price patterns may not be repeated in
5. The mutual fund cash position of 10% is relatively high. This would indicate a bullish
market because: (1) the theory of contrary-opinion states that mutual funds are the odd–
6. Credit balances result when investors sell securities and leave the proceeds with their
broker with the intent of reinvesting the funds shortly. Therefore, they can be considered
7. This index indicates what proportion of investment advisory services are bearish and 61%
is a fairly high ratio. To a contrary opinion technician this is bullish because so many of
Solutions for Chapter 10: Questions and Problems
8. Debit balances represent borrowing by sophisticated investors, therefore higher debit
balances indicate optimism on the part of these investors so it is considered a bullish
9. The Dow Theory contends that stock prices move in waves. Specifically, these waves
may be grouped into three categories based upon the period of the wave: (1) major trends
10. The direction of a price movement accompanied by high volume is more important than
11. The breadth of the market index is a time series calculated as the cumulative number of
net advances or net declines. It indicates a peak or trough in stock prices prior to the peak
12. Technicians following the breadth of market rules might interpret the event as indicative
of a possible market peak. Since the DJIA is a value-weighted series confined to 30 large
13. A support level is a price range where considerable demand is expected, while a
resistance level is a price range where a large supply is expected. Support and resistance
levels exist due to the behaviour of a number of investors who are closely monitoring the
market and will trade quickly at attractive price levels. Specifically, a support level
Solutions for Chapter 10: Questions and Problems
14. A moving average line indicates the major trend of a security’s price. When daily prices
15. If current prices break through the 50-day MA line from above on heavy volume,
16. Relative strength is the ratio of a firm’s stock price to a market price series. If the relative
17. Technicians recognize that there is no single technical trading rule that is correct all the
time – even the best ones miss certain turns or give false signals. Also, various indicators
Solutions for Chapter 10: Questions and Problems
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CHAPTER 10
Answers to Problems
1. Student Exercise
4. 40
39
38 X 0
37 X 0
36 X 0
35 X 0
5.a. Day 4 = (14,010 + 14,100 + 14,165 + 14,080)/4 = 56,355/4 = 14,088.75
Day 5 = (14,100 + 14,165 + 14,080 + 14,070)/4 = 56,415/4 = 14,103.75
Solutions for Chapter 10: Questions and Problems
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5.b. With this value for Day 13, the four-day moving average would be
6. Day 1 2 3 4 5
Net advances +448 +95 +519 -499 -193
6.a. (advances minus declines)