CTA Market Structure & Price Theory 2 — Questions and Answers
Question 1: In Wyckoff analysis, what does the 'Spring' represent?
- A breakout above resistance
- A false breakdown below support designed to shake out weak holders (Correct answer)
- A sharp upward rally after a base
- A secondary test of a high
Correct answer: A false breakdown below support designed to shake out weak holders
The Spring is a Wyckoff event where price briefly dips below a trading range's support to trigger stop-losses before reversing sharply higher, signaling institutional buying.
Question 2: The concept of 'price memory' in technical analysis refers to:
- The ability of algorithms to recall historical data
- The tendency of price to react to previously established levels (Correct answer)
- A software tool for charting
- The lag effect in moving averages
Correct answer: The tendency of price to react to previously established levels
Price memory describes the market's tendency to react at prior support/resistance zones because traders remember and place orders at those historically significant levels.
Question 3: Which type of gap occurs within an established trend and signals trend continuation?
- Exhaustion gap
- Common gap
- Runaway (continuation) gap (Correct answer)
- Breakaway gap
Correct answer: Runaway (continuation) gap
A runaway or measuring gap appears in the middle of a strong trend on high volume, confirming that the trend has momentum and is likely to continue.
Question 4: In Elliott Wave Theory, how many waves make up a complete motive (impulse) wave sequence?
- 3
- 5 (Correct answer)
- 7
- 8
Correct answer: 5
An Elliott Wave impulse sequence consists of five waves: three in the direction of the trend (waves 1, 3, 5) and two corrective waves (waves 2, 4).
Question 5: What does 'price discovery' mean in the context of technical analysis?
- Finding the book value of a stock
- The market process of determining an asset's fair price through supply and demand (Correct answer)
- Calculating intrinsic value using DCF
- Identifying gaps in a price chart
Correct answer: The market process of determining an asset's fair price through supply and demand
Price discovery is the market mechanism where buyers and sellers interact to establish an asset's current price, which technicians track through chart patterns and price action.
Question 6: A 'failed breakout' (also called a bull trap) occurs when:
- Price breaks above resistance but quickly reverses back below it (Correct answer)
- Price fails to reach a prior high in an uptrend
- Volume increases on a down day
- A moving average crosses below price
Correct answer: Price breaks above resistance but quickly reverses back below it
A bull trap occurs when price pierces above a resistance level, enticing buyers, then reverses sharply downward, trapping late buyers at unfavorable prices.
CTA Market Structure & Price Theory 2
In Wyckoff analysis, what does the 'Spring' represent?