CPT Technical Analysis & Chart Patterns 3 — Questions and Answers
Question 1: What does a 'negative divergence' between price and RSI indicate?
- Price and RSI are both rising together
- Price makes a higher high but RSI makes a lower high (Correct answer)
- Price falls while RSI rises sharply
- RSI crosses above the 70 level
Correct answer: Price makes a higher high but RSI makes a lower high
Negative (bearish) divergence occurs when price achieves a higher high while RSI forms a lower high, warning of weakening momentum.
Question 2: In the context of Bollinger Bands, a 'Bollinger squeeze' refers to:
- Price breaking out above the upper band
- Bands narrowing significantly, signaling a potential volatility expansion (Correct answer)
- Price trading at the midline for an extended period
- The upper band crossing above a moving average
Correct answer: Bands narrowing significantly, signaling a potential volatility expansion
A Bollinger squeeze occurs when bands contract to unusually narrow widths, often preceding a large directional price move.
Question 3: The 'neckline' in an inverse head and shoulders pattern is defined as:
- The lowest point of the head
- The line connecting the highs of the two shoulders (Correct answer)
- The average price across the formation
- The 200-day moving average at the time of pattern formation
Correct answer: The line connecting the highs of the two shoulders
The neckline connects the reaction highs (peaks) between the left shoulder, head, and right shoulder of an inverse head and shoulders.
Question 4: On-Balance Volume (OBV) is used primarily to:
- Measure the rate of price change
- Confirm price trends using cumulative volume flow (Correct answer)
- Calculate average daily price ranges
- Identify overbought and oversold conditions
Correct answer: Confirm price trends using cumulative volume flow
OBV accumulates volume on up days and subtracts it on down days, helping confirm whether volume supports the prevailing price trend.
Question 5: A 'pennant' continuation pattern is most similar in structure to which other pattern?
- Double top
- Symmetrical triangle (Correct answer)
- Ascending channel
- Island reversal
Correct answer: Symmetrical triangle
A pennant resembles a small symmetrical triangle but forms on a steep flagpole and resolves as a continuation, not a reversal.
Question 6: When using the Average True Range (ATR) indicator, a trader primarily uses it to:
- Identify trend direction
- Determine the strength of a breakout signal
- Measure market volatility for stop placement (Correct answer)
- Calculate the ideal entry price
Correct answer: Measure market volatility for stop placement
ATR measures average daily volatility, making it ideal for setting stop-loss distances that account for normal price fluctuation.
Question 7: A bearish 'evening star' candlestick pattern is confirmed when:
- The first candle is a small-bodied doji
- The third candle closes deep into the body of the first bullish candle (Correct answer)
- The second candle gaps up and the third gaps down
- Volume is below average on all three sessions
Correct answer: The third candle closes deep into the body of the first bullish candle
The evening star is confirmed when the third bearish candle closes significantly into the prior large bullish candle's body, showing reversal conviction.
CPT Technical Analysis & Chart Patterns 3
What does a 'negative divergence' between price and RSI indicate?