APPENDIX D Answers to Exams EXAM 1 ANSWERS 1. © Technical analysis is based on security prices not moving randomly. ‘They move in repeating and identifiable patterns. 2. D_ Price movements are simply the reflection of changes in supply and demand. If demand is greater than supply, prices will increase. IF supply is, greater than demand, prices will decline. 3. © Technicians believe that itis futile to study fundamental data since they are already reflected in the market price of a stock. 4. D- ‘Typically, prices moving either up or down will first decelerate the movement in the direction of the trend and then give warning prior to changing direction, Rarely does a trend reverse instantly. 5. D_ Technical analysis can be applied effectively to virtually any trading medium including stocks, bonds, options, mutual funds, exchange traded funds, and commodities. 6. A- Technical analysis can be applied effectively to virtually any invest ment horizon—from very short term to very long term. You can apply it by examining tic by ti, intraday, daily, weekly, monthly, or some other interval of data, 1. A Bar charts are, by far, the most commonly used type of price chart. 8. © Ina bar chart, a vertical line that ranges from the period’ lowest price to its highest price represents each time period. 8. A Ahorizontal protrusion to the left marks the period’s opening price. 10. DA horizontal protrusion to the left marks the period’s closing price. 11. B- Some technicians believe that the closing price is the most impor tant price of the trading day, and, therefore, they plot only closing prices in a line chart. « 335336 > Appendix D 12, € Technicians consider the long term to be approximately six months to one year from the current period. 13. A Technicians often use hourly and daily charts to determine the short-term trend of security price movements. 14. D- Monthly charts help technicians examine the long term. 15. A Onanarithmetic is shown on the vertical scale. Thus, the distance between 10 and 20 on the vertical scale equals the distance between 20 to 30, 30 to 40, and so on. le, an equal distance for each price unit of change 16. D Ona logarithmic scale, the distance between each price unit of change represents an equal percentage change. Thus, the difference between 10 to 20, 20 to 40, and 100 to 200 is the same because each represents a 100 percent increase. 17. GC Reversal chart patterns war of likely changes in direction, either from up to down or down to up. They are reliable, but not infallible, 18. € The forming of a market top and subsequent price reversal to the downside occurs as a result of supply overcoming demand (known as distribution). 198, A The forming of a market bottom and subsequent price reversal to the upside occurs as a result of demand overcoming supply (known as accumulation). 20. © ‘The more time it takes for a reversal chart pattern to form, the more reliable the signal generated is, as well as the time horizon (short, intermediate, or long term) forecasted by the signal. 21, DA symmetrical triangle is a consolidation chart pattern, 22, A Key reversals usually occur during one day of market activity. 23, DA key reversal has only short-term (minor trend) significance. 24, B_ The chart pattern that formed at the bottom of Exam 1-1 is a head- and-shoulders bottom. 25, 3 Right shoulder 4 Neckline 2 Head 5 Breakout 1 Left shoulder 6 Price objective 26. D After penetrating the neckline of a head-and-shoulders top and moving lower, it is not uncommon for prices to pull back to the neckline before continuing their descent.Answers to Exams ¢ 337 27. B_ The chart pattern labeled 1 in the box on Exam 1-2 is a rounding bottom. 28. A Rounding tops and bottoms are unlike many other reversal chart patterns that form from a much quicker shift in supply and demand. 29. © Ascending and descending triangles are considered intermediate term patterns, usually taking from one to three months to complete. They offer excellent profit opportunities. They are relatively easy to spot as they develop, and they have measuring implications in regard to how far prices are expected to move after a breakout. 30. DA descending triangle chart pattern formed at the top right of Exam 1-3 by prices moving from points 1 through 7. 31. B As the descending triangle chart pattern formed, supply grew, but it continued to meet demand at a certain price level. Once the demand was exhausted, prices broke out of the pattern and quickly moved lower. 32. A Anascending triangle chart pattern formed on Exam 1-4 by prices moving from points 1 though 7. 33. © A price breakout of an ascending triangle chart pattern established a price objective line drawn parallel to the bottom boundary line from the top of the first rally that initiated the pattern. This line slopes up and to the right but provides no indication as to when the price objective will be met. 34, € A closing price outside the upper or lower boundary line of a rect- angle pattern implies the direction of the trend. If the closing price is above the upper boundary line, the probability is that prices will move higher. 35, D_ The chart pattern labeled 1 in the box on Exam 1-5 is a double top. 36. D_ For adouble top to be valid, the valley should be at least 15 percent lower than the top peak price. 37. B_ The chart pattern labeled 1 on Exam 1-6 is a V bottom. 38. AV formations occur so quickly and with such little warning that these patterns can be spotted only after the fact and only after a significant move in the opposite direction has already occurred. Thus, profit opportuni- ties are limited with regard to V formation chart patterns. 39. AA consolidation formation temporarily interrupts an up or down move in prices. Prices continue in the same direction upon a breakout from a consoli ion formation, 40. B A diamond is a reversal chart pattern, 41, D_ The price movement shown between the upper boundary line labeled 2 and the lower boundary line labeled 3 on Exam 1-7 most closely represents a flag consolidation chart pattern.