Study Guide for Technical Analysis Explained Fifth Edition / Edition 5

by Martin J. Pring

Overview

Technical Analysis Explained is the definitive guide for mastering technical analysis. In this hands-on companion, technical analysis wizard Martin Pring serves as your personal investing coach, taking you step-by-step through his long-proven methods.

Packed with hundreds of questions that correspond to chapters and sections throughout the book, Study Guide for Technical Analysis Explained, Fifth Edition, features:

• Charts and graphs to help you visually digest the concepts presented
• Full text answers to guarantee your complete understanding of each important idea
• Fill-in-the-blank, multiple-choice, and matching question formats
• The straightforward, no-nonsense style that made Technical Analysis Explained a classic

Technical analysis mastery isn't easy, but its financial rewards make it indispensable. Use Study Guide for Technical Analysis Explained to reach the next level of technical analysis education and ensure that you start every trading day with the skills you need to come out on top.

Product Details

ISBN-13:	9780071823982
Publisher:	McGraw Hill LLC
Publication date:	01/10/2014
Pages:	224
Sales rank:	942,556
Product dimensions:	5.90(w) x 8.90(h) x 0.60(d)

About the Author

Martin J. Pring is the chairman of Pring Turner Capital groups as well as the strategist for the Pring Turner Business Cycle ETF (symbol DBIZ). He is the founder of Pring.com, which provides research for financial institutions and individual investors around the world. The site also features a 15+ hour interactive online video training course on technical analysis. Since 1984, he has published the InterMarket Review, a monthly market review offering a long-term synopsis of the world's major financial markets, and, in 2013, he joined Golden Gate University as an adjunct professor teaching a virtualgraduate-level course on technical analysis.

Read an Excerpt

Study Guide for Technical Analysis Explained

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By MARTIN J. PRING

McGraw-Hill Education

Copyright © 2014 McGraw-Hill Education
All rights reserved.
ISBN: 978-0-07-182398-2

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CHAPTER 1

THE DEFINITION AND INTERACTION OF TRENDS

Questions

Subjects to Be Covered

The most common types of trends

The basics of peak-and-trough analysis

How peaks and troughs are recognized.

1. Name the three most important and widely used trends.

A. ___________________________

B. ___________________________

C. ___________________________

2. Match the answers for the duration of these trends.

A. Short _______ A. 10 to 25 years

B. Intermediate _______ B. 2 to 6 weeks

C. Primary _______ C. 6 weeks 9 months

D. Secular _______ D. 9 months to 2 years

3. Who needs to have an understanding of the direction and maturity of the main trend?

A. Investors

B. Traders

C. A and B

D. None of the above

4. Peak-and-trough analysis:

A. Is far too simplistic an approach for technicians to deal with

B. Was very useful in Dow's day, but is now outdated by more sophisticated approaches and tools

C. Should be used in conjunction with other tools in the weight of the evidence approach

D. Only works with short-term and intermediate trends

E. C and D

5. In this chart, which letter marks the reversal in the upward progression of troughs?

A. _________________________

B. _________________________

C. _________________________

D. _________________________

6. Can the principles of peak-and-trough progression be applied to a 5- minute bar chart?

A. Yes

B. No

7. In a general sense, why are longer-term trends easier to spot?

A. Because the bigger they are, the easier it is to see them.

B. Because there is less random noise as the trend gets longer. Also, the expectations of market participants tend to unfold in a more gradual way as the fundamentals evolve.

C. Because there are always five intermediate movements in every primary trend, so all you have to do is count to five.

D. None of the above

8. Please look at the chart featuring Citigroup. If you knew that the high and low preceding the rally at A were 6 and 4 and the close at A was 4.25, would this represent a legitimate peak in peak-and-trough analysis?

A. Yes

B. No

9. If C qualifies as a legitimate trough, where is the reversal signal: at D or at the end of the arrow indicated at E?

10. True or false: At B, the series of rising peaks and troughs was reversed.

A. True

B. False

11. What is the most dominant or influential trend?

A. Intermediate

B. Short-term

C. Primary

D. Secular

E. Socular

12. True or false: It's a good idea to go for consistency, but even better to go for perfection.

A. True

B. False

THE DEFINITION AND INTERACTION OF TRENDS

Answers

1. Short, intermediate, and primary. Any order qualifies as a correct answer. The secular trend is an important trend, but is not widely followed.

2. A-B; B-C; C-D; and D-A

3. C. Investors need to know the direction of the long-term trend to correctly position themselves for the long-term. Since a short-term contratrend moves often result in weak price movements and numerous whipsaws, short-term traders also need to form an opinion on the direction of the primary trend. A well-known trading rule is always trade in the direction of the trend.

4. C. Peak-and-trough analysis is a basic tool of technical analysis and should never be underrated.

5. C.

6. A. The principles of technical analysis can be applied to any security in any time frame.

7. B. Not only are they easier to spot, but generally speaking, the longer the time span, the more accurate the indicator.

8. B. No, the rally at A did not retrace between one-third and two-thirds of the previous decline.

9. E. Because the series of declining troughs was still intact at D.

10. B. Only the series of rising troughs was reversed at B. The rising peaks were still intact.

11. D. The secular trend determines the characteristics of the primary trend, which determines the characteristic of the intermediate, etc. There is no such thing as the "socular" trend.

12. B. Because perfection can never be achieved in financial markets whose prices are determined by psychology.

CHAPTER 2

FINANCIAL MARKETS AND THE BUSINESS CYCLE

Questions

Subjects to Be Covered

The chronological relationship between the financial markets and the business cycle

When they peak and trough in the cycle

Understanding the significance of the leads and lags

The six stages

Double cycles

The role of technical analysis

1. Trends in financial markets are:

A. Determined by investors' expectations of movements in the economy

B. The effect those changes are likely to have on the price of the asset in which a specific financial market deals

C. The psychological attitude of investors to these fundamental factors

D. All of the above

2. Which is the correct chronological sequence for peaks and troughs in the financial markets over the course of the business cycle?

A. Bonds, stocks, commodities

B. Stocks, commodities, bonds

C. Bonds, gold, stocks, commodities

D. None of the above

3. When are commodities most likely to bottom during a recession?

A. When it is particularly severe

B. When the preceding commodity rally has been particularly speculative

C. When stocks bottom earlier than usual

D. Never

4. Why does the nature of price moves in bonds, stocks, and commodities differ between different business cycles?

A. Because they discount different things

B. Because each business cycle has different characteristics

C. Because the leads and lags differ

D. None of the above

5. True or false: If there is no recession there, is no financial market cycle.

A. True

B. False

6. If the lead between bonds and stocks at a market bottom is particularly long, you should expect to see:

A. A weaker bull market in stocks

B. A stronger-than-average bull market in stocks

C. Nothing out of the ordinary

D. A weak commodity bull market

7. When a recovery extends beyond the normal 4 years without a recession but the growth rate slows down noticeably in the middle:

A. This is known as a double cycle.

B. The financial markets do not experience the normal chronological sequence.

C. The financial markets do experience the usual chronological sequence.

D. A and C.

8. Knowing that there is usually a chronological sequence of financial markets is very interesting, but how can technical analysis be used to identify these points?

A. By trial and error

B. By using long-term moving averages and other techniques for individual markets

C. By identifying the position of individual markets with several technical indicators and relating them to each other as a cross-check

D. None of the above

9. Fill in the blank: When stocks and bonds are bullish and commodities are bearish, this is Stage_____

10. Which industry groups or sectors have a tendency to do well in Stages IV and V?

A. Earnings driven

B. Liquidity driven

C. All sectors

D. Sectors sensitive to interest-rate movements

FINANCIAL MARKETS AND THE BUSINESS CYCLE

Answers

1. D.

2. A.

3. B. Because the speculative positions are being unwound very quickly due to margin calls. However, a sustainable commodity rally does not develop until the economy tightens sufficiently to result in a fundamental increase on the demand side.

4. B. Each cycle has its own characteristics, in that distortions develop in different sectors. For example, in 1970, it was housing; 1973 in the commodity arena; in the mid-1980s in the S&Ls; in 2000, the tech boom; in 2007 housing; and so forth.

5. B. Growth recessions (double cycles) still experience the financial market rotation.

6. B. This is because the long lead time indicates a weak economy in which substantial cost reductions result in lower breakeven points. When the economy expands, the increase in revenues goes straight to the bottom line. When profits rise, so normally do stock prices.

7. D.

8. C. B is correct as far as it goes, but C is a more complete answer because it uses the weight-of-the-evidence approach.

9. Stage II

10. A.

CHAPTER 3

DOW THEORY

Questions

Subjects to Be Covered

The concept

The tenets of the theory

Who developed the Dow theory

How turning points are recognized

The theory's limitations

1. Which of the following statements are correct?

A. Dow theory is not concerned with the direction of a move, only its duration.

B. Dow theory is not concerned with the duration of a move, only its direction.

C. Dow theory is concerned with both the direction and duration of a move.

D. None of the above

2. Which of these statements is incorrect?

A. Dow was concerned with forecasting stock prices.

B. Dow developed and called the Dow theory after himself.

C. Dow was concerned with forecasting business conditions through the use of stock prices.

D. A and B

3. What is the signal that triggers a primary bull trend?

A. A series of rising intermediate peaks and troughs by either average

B. A dividend yield in the Dow Jones Industrial Average in excess of 6 percent

C. Both averages confirming a series of rising intermediate peaks and troughs

D. A and B

4. Which of the following are basic tenets of Dow theory?

A. The averages discount everything.

B. The Dow Jones Industrial Average must yield less than 3 percent before a top can be signaled.

C. Price action determines the trend.

D. Lines form market tops, but only after the Dow Jones Industrial Average yields less than 3 percent.

E. The averages must confirm.

F. Volume must expand on declines.

G. A, B, E, and F

H. A, C, and E

5. Who developed Dow's principles and organized them into something approaching the theory as we know it today?

A. Dow himself

B. Robert Rhea

C. William Peter Hamilton

D. Gartley

6. True or false: When compared to the buy-hold approach, Dow theory works just as well in secular bull markets as in multiyear trading ranges.

A. True

B. False

7. Looking at the following chart featuring intermediate rallies and reactions, what is happening at point A?

A. A Dow theory buy signal

B. A Dow theory sell signal

C. A sell signal by the Industrials that is unconfirmed by the Transports

D. A sell signal by the Transports that is unconfirmed by the Industrials

8. Which of these statements is correct?

A. Dow theory is easy to interpret if you follow the rules exactly.

B. Dow theory often leaves the analyst in doubt because it is sometimes difficult to identify intermediate price movements.

C. Because Dow theory has beaten the buy-hold approach for most of the twentieth century, it will continue to do so in the twenty-first.

D. None of the above

9. Which of the following are not tenets of Dow theory?

A. The averages discount everything.

B. The averages must confirm.

C. Volume is an integral part of the theory.

D. Price action determines the trend.

E. A, B, and C

F. A and B

10. If Dow theory unequivocally signals a primary trend reversal, this:

A. Guarantees that the primary trend has reversed

B. Is one piece of evidence, and a very important one, that the primary trend has reversed

C. Is unlikely to result in a bear market because the theory is outdated

D. Means that the size of the previous primary trend can be used as a basis for forecasting the duration and magnitude of the next primary trend

E. B and D

DOW THEORY

Answers

1. B.

2. D.

3. C.

4. H.

5. C.

6. B. Dow theory tends to give whipsaws in strong secular bull markets.

7. C. The Industrials trigger a sell signal, but the Transports continue to trace out a line formation. When the price breaks below the lower level of the line, a confirmation is given and a Dow theory bear market is confirmed.

8. B.

9. C. Volume is a background factor used to help interpret market turning points; it is not an integral part of the theory.

10. B. Dow theory offers just one piece of evidence that the trend has reversed. It certainly does not guarantee that a new primary trend is unfolding, and definitely does not forecast the magnitude and duration of the next one. This is because there is no known method of accurately and consistently forecasting the magnitude and duration of a forthcoming price trend.

CHAPTER 4

TYPICAL PARAMETERS FOR INTERMEDIATE TRENDS

Questions

Subjects to Be Covered

The relationship between intermediate and primary trends

The importance of intermediate trends

Differentiating between pro- and countertrends

Reasons for intermediate trends

The nature of intermediate trends

1. Why is it helpful to have an understanding of the character and duration of a typical intermediate trend?

A. To help asses when the next short-term trend will begin

B. To help assess when the next primary trend is likely to begin

C. To improve success rates in trading

D. B and C

2. Recognizing that there are numerous exceptions to this rule, in classic technical theory, how many intermediate trends does a primary trend comprise?

A. 7

B. 3

C. 5

D. None of the above

3. A bear market intermediate rally:

A. Typically lasts for 2 weeks

B. Is a countercyclical trend

C. Sometimes develops at the end of a bull market

D. None of the above applies

4. Which of the following apply to intermediate corrections in a bull market?

A. They can be extremely treacherous.

B. They are usually easy to short and can therefore be extremely profitable.

C. They last longer than an intermediate price movement.

D. A and C

5. Which of the following are legitimate causes for an intermediate correction in a bull market?

A. Deteriorating political climate

B. Falling interest rates

C. Rising interest rates

D. Reduced expectations for corporate profits

E. Traders covering short positions

F. A, B, and E

G. A, B, C, and D

H. A, C, and D

6. Based on Gartley's observation for the stock market between 1895 and 1935, how many phases of liquidation is the norm for an intermediate correction in a bull market?

A. 1

B. 2

C. 3

D. None of the above

7. True or false: A secondary correction must be an upward or downward price movement.

A. True

B. False

8. Which statement best describes the difference between a primary intermediate price movement and a secondary reaction?

A. A secondary reaction develops in a bull market, and a primary intermediate price movement develops in a bear market.

B. A primary intermediate price movement develops in a bull market, and a secondary reaction develops in a bear market.

C. A primary intermediate price movement develops in the direction of the main trend, and a secondary reaction is a countercyclical price movement.

D. None of these answers is correct.

9. Intermediate trends in security prices are determined by:

A. The attitude of market participants to the emerging fundamentals

B. The level of interest rates

C. Corporate profits and other fundamentals

D. None of the above

10. As a general tendency, which statement is correct?

A. The bigger the preceding intermediate rally, the larger the retracement.

B. The smaller the preceding intermediate decline in a bear market, the smaller the bear market rally.

C. The larger the intermediate rally in a bull market, the smaller the retracement move.

D. None of the above

(Continues...)

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Table of Contents

Contents

How to Use This Study Guide,
1 The Definition and Interaction of Trends,
2 Financial Markets and the Business Cycle,
3 Dow Theory,
4 Typical Parameters for Intermediate Trends,
5 How to Identify Support and Resistance Zones,
6 Trendlines,
7 Basic Characteristics of Volume,
8 Classic Price Patterns,
9 Smaller Price Patterns and Gaps,
10 One- and Two-Bar Price Patterns,
11 Moving Averages,
12 Envelopes and Bollinger Bands,
13 Momentum I: Basic Principles,
14 Momentum II: Individual Indicators,
15 Momentum III: Individual Indicators,
16 Candlestick Charting,
17 Point and Figure Charting,
18 Miscellaneous Techniques for Determining Trends,
19 The Concept of Relative Strength,
21 Price: The Major Averages,
22 Price: Sector Rotation,
23 Time: Analyzing Secular Trends for Stocks, Bonds, and Commodities,
24 Time: Cycles and Seasonal Patterns,
25 Practical Identification of Cycles,
26 Volume II: Volume Indicators,
27 Market Breadth,
28 Indicators and Relationships That Measure Confidence,
29 The Importance of Sentiment,
20 Integrating Contrary Opinion and Technical Analysis,
31 Why Interest Rates Affect the Stock Market,
32 Using Technical Analysis to Select Individual Stocks,
33 Technical Analysis of International Stock Markets,
34 Automated Trading Systems,
Index,