5. Technical Indicators
e. describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and flow of funds);
What is a technical indicator?
A technical indicator is a series of data points derived by applying a formula to the price data of a security.
What is a golden cross indicator and what does it mean?
A golden cross is a crossover involving a security's short-term moving average (such as a 15-day moving average) breaking above its long-term moving average (such as a 50-day moving average) or resistance level. As long-term indicators carry more weight, the golden cross indicates a bull market on the horizon and is reinforced by high trading volumes.
What is a dead cross indicator?
A dead cross shows the opposite movement of the moving average.
What are Bollinger bands?
Bollinger Bands are volatility bands placed above and below a moving average. Volatility is based on the standard deviation. The bands automatically widen when volatility increases and narrow when volatility decreases.
What is a rate of change oscillator (ROC) or a momentum oscillator?
A rate of change oscillator (ROC) or a momentum oscillator measures the percentage price change over a given time period.
What is a relative strength index (RSI)?
A relative strength index (RSI) compares the average price change of the advancing periods with the average change of the declining periods. It is a momentum oscillator that measures the speed and change of price movements.
What is a stochastic oscillator?
A stochastic oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods.
What is a moving average convergence-divergence (MACD)?
The moving average convergence-divergence (MACD) turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, MACD offers the best of both worlds: trend-following and momentum.
What are sentiment indicators?
Sentiment indicators attempt to gauge investor activity for signs of increasing bullishness or bearishness.
Are put options believed to be signals of bullish or bearish attitudes?
Put options are believed to be signals of bearish attitudes.
What is a put/call ratio?
Put options are believed to be signals of bearish attitudes. Technicians reason that a higher put/call ratio indicates a more pervasive bearish attitude, which they consider a bullish indicator.
What is the CBOE Volatility Index and what does it represent?
The CBOE Volatility Index, often referred to as the fear index, measures the implied volatility of S&P 500 index options. It represents one measure of the market's expectation of stock market volatility over the next 30-day period.
What is margin debt and what does it represent?
Debt balances in brokerage accounts represent borrowing by knowledgeable investors from their brokers. These balances indicate the attitude of a sophisticated group of investors who engage in margin transactions. An increase would be a bullish sign while a decline would indicate selling as these sophisticated investors liquidate their positions (and this could indicate less capital available for investing).
What is the short interest ratio and what does it mean?
This ratio is derived by dividing the short interest by the average daily volume for a stock. It provides a number that is used by investors to determine how long it will take short sellers, in days, to cover their entire positions if the price of a stock begins to rise. The higher the ratio, the longer it will take to buy back the borrowed shares - an important factor, upon which traders or investors decide whether to take a short position.
What are flow-of-funds indicators?
Flow-of-funds indicators attempt to measure the ability or the financial position of different investor groups. These indicators try to measure their capacity of these groups to buy or sell stocks. They also attempt to measure where the money is going.
What is the flow-of-funds indicator called arms-index or TRIN?
An arms index, also called the TRIN, is a breadth indicator that measures the relative extent to which money is moving into or out of rising and declining stocks.
What is the flow-of-funds indicator for mutual fund cash position?
Mutual funds hold some part of their portfolio in cash. The cash ratios (ratios of cash as a percentage of the total assets in mutual funds' portfolio) are usually from 5-13%. A high percentage of cash is a bearish indicator, and vice versa.