Technical Analysis Test Answers
True or False:
1. Once support is broken, it becomes resistance?
True
2. A Symmetrical Triangle is more bullish than an Ascending Triangle?
False
3. There is an indirect correlation between the slope of a trendline and its importance? For example, a trendline with a 65 degree slope is more meaningful than a trendline with a 30 degree slope?
False
4. Descending Triangles have a negative bias to them, while Ascending Triangles have a positive bias to them?
True
5. An ascending triangle can form at the end of a downtrend?
True
These are called bottom basing breakout patterns.
6. In Ascending, Descending, and Symmetrical Triangles, you generally want to see the volume increase as the pattern develops?
True
7. Stock ABC breaks through resistance on strong volume and rallies for a couple of weeks. After the strong rally, the stock then moves sideways to slightly down on low volume. This declining volume after the stock rallies is very bearish?
False
The declining volume on a pullback, after a run-up, is bullish. It shows that most traders are willing to hold.
8. A Falling Wedge has a negative bias?
False
A Falling Wedge has a positive bias.
9. When short term trading, especially for day trading, good volume is important when playing breakout stocks. A good strategy is to buy breakouts that express good volume relative to their 60 day average volume.
Consider this example: Stock ABC has resistance at $20.10 and has a 60 day average volume of 1,000,000 shares. At 12:00pm eastern standard time (which is 3 hours into the trading day), stock ABC breaks it's resistance and is now at $20.12. Upon Breakout, the current volume is only 600,000 shares which is 400,000 shares below the 60 day average volume of 1,000,000 shares. However, Stock ABC still represents a good trade and the a trader should go long ABC?
For a HINT on this one, click on the "How To Play Breakouts" link on the right hand tool bar.
True
Even though the volume at the time of the breakout was less than the 60 day average volume of 1,000,000 shares, by using the formula on the "How To Play Breakouts" section, the volume is greater than the 60 day average volume by a relative time basis - i.e. there is still 3.5 more hours left in the day.
600,000 / 3 = 200,000
200,000 x (6.5) = 1,300,000
thus, 1,300,000 > 1,000,000 on a relative time basis, therefore volume is sufficient.
Fill in the blank
1. If a stock makes two successive lower highs and two successive higher lows, what chart pattern is potentially forming?
Symmetrical Triangle
2. If a stock makes two successive lower highs, but support is not broken, what chart pattern is potentially forming?
Descending Triangle
3. If a stock makes two successive higher lows, and has met resistance twice but not broken it, what potential chart pattern do we have here?
Ascending Triagnle
4. What kind of triangle pattern usually forms during an up trend as a continuation pattern?
Ascending Triangle
5. What is it called when a stock’s price makes a higher high, but the MACD makes a lower high?
Negative Divergence
6. What is it called when a stock’s price makes a lower low, but the MACD makes a higher low?
Positive Divergence
7. What type of divergence would most likely be associated with a Rising Wedge pattern?
Negative Divergence
8. A particular stock has been in a downtrend for many months and a clearly defined downtrend line can be drawn connecting each lower high. Recently, the stock gapped above this resistance line on very heavy volume. What would be a good course of action.
a) Short the stock because gaps are almost always filled right away.
b) Do nothing because gaps are very hard to trade and unpredictable.
c) Go long the stock because these types of gaps are bullish.
c) is the correct answer
What is the name of the gap pattern in the previous question?
Breakaway Gap
9. Say for instance that you are watching stock ABC is a potential short candidate because it has a Descending Triangle pattern. However, one day you notice that rather than falling through support, the price breaks to the upside above the descending line on increasing volume. What would be a good course of action:
a) Move on to another stock because Descending Triangles are supposed to break down, thus this pattern failed.
b) Go long the stock
c) Short the stock.
b) is the correct answer. Statistical information from the book, Encyclopedia of Chart Patterns by Thomas N. Bulkowski - Publisher: John Wiley & Sons, shows that failed Descending Triangles (ones that break to the upside) have one of the highest returns off all stock patterns with an average rise of 42%!!!!
10. The VIX or Volatility Index usually moves in direct correlation with the Nasdaq, i.e. when the VIX goes up, so does the Nasdaq usually?
False
The VIX generally moves in an indirect correlation with the Nasdaq.
11. Fibonacci numbers are very useful in technical analysis, what are the three most commonly used numbers?
38.2, 50.0, 61.8
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