Stock Trading Stock Trading Technical Analysis & Chart Patterns 1 — Questions and Answers
Question 1: What does a 'head and shoulders' chart pattern typically signal?
- A bullish continuation
- A bearish reversal (Correct answer)
- A period of consolidation
- A breakout to new highs
Correct answer: A bearish reversal
The head and shoulders pattern consists of three peaks—the middle being highest—and signals that an uptrend may be reversing to a downtrend.
Question 2: What does the Relative Strength Index (RSI) measure?
- Volume relative to prior trading days
- The speed and magnitude of price changes (Correct answer)
- The ratio of a stock's return to the market return
- The number of advancing vs. declining stocks
Correct answer: The speed and magnitude of price changes
RSI is a momentum oscillator that measures the speed and change of price movements on a scale of 0 to 100, identifying overbought or oversold conditions.
Question 3: What is a 'support level' in technical analysis?
- A price ceiling where selling pressure emerges
- A price floor where buying interest tends to prevent further decline (Correct answer)
- The average price over a set time period
- A government-mandated trading halt price
Correct answer: A price floor where buying interest tends to prevent further decline
A support level is a price point where demand is strong enough to prevent the stock from falling further, often acting as a 'floor.'
Question 4: What does a 'golden cross' indicate in technical analysis?
- The 50-day moving average crosses above the 200-day moving average (Correct answer)
- The stock price crosses above its 52-week high
- Volume crosses above its 30-day average
- The RSI crosses above the 70 level
Correct answer: The 50-day moving average crosses above the 200-day moving average
A golden cross occurs when the short-term 50-day moving average crosses above the longer-term 200-day moving average, signaling potential bullish momentum.
Question 5: What does high trading volume during a price breakout suggest?
- The breakout is likely a false signal
- The breakout has stronger conviction and is more reliable (Correct answer)
- The stock is about to reverse
- Institutional selling is occurring
Correct answer: The breakout has stronger conviction and is more reliable
High volume during a breakout confirms strong buying or selling conviction, making the move more likely to be sustained rather than a false breakout.
Question 6: What is a 'candlestick' chart?
- A chart showing only closing prices connected by a line
- A bar chart showing open, high, low, and close with a colored body (Correct answer)
- A chart displaying moving averages only
- A chart plotting volume against price
Correct answer: A bar chart showing open, high, low, and close with a colored body
Candlestick charts display each period's open, high, low, and close prices, with the body colored to show whether price rose (bullish) or fell (bearish).
Stock Trading Stock Trading Technical Analysis & Chart Patterns 1
What does a 'head and shoulders' chart pattern typically signal?