CTA Market Structure & Price Theory 1 — Questions and Answers
Question 1: In Dow Theory, what does a 'higher high followed by a higher low' indicate?
- A confirmed downtrend
- A confirmed uptrend (Correct answer)
- A market reversal
- Sideways consolidation
Correct answer: A confirmed uptrend
Dow Theory defines an uptrend as a series of higher highs and higher lows, confirming bullish market structure.
Question 2: Which market phase in Wyckoff theory is characterized by institutional accumulation of shares at low prices?
- Markup phase
- Distribution phase
- Accumulation phase (Correct answer)
- Markdown phase
Correct answer: Accumulation phase
In Wyckoff's methodology, the accumulation phase occurs when smart money quietly builds positions at depressed price levels before a markup begins.
Question 3: What is the primary purpose of identifying support and resistance levels in technical analysis?
- To calculate fundamental value
- To predict dividend yields
- To identify price zones where buying or selling pressure is significant (Correct answer)
- To measure earnings growth
Correct answer: To identify price zones where buying or selling pressure is significant
Support and resistance levels mark price zones where historical supply and demand imbalances tend to recur, making them critical decision points for traders.
Question 4: When a former resistance level becomes support after a breakout, this phenomenon is called:
- Role reversal (Correct answer)
- Price inversion
- Trend continuation
- Gap fill
Correct answer: Role reversal
Role reversal describes the principle that once price decisively breaks through resistance, that level often flips to act as new support on subsequent pullbacks.
Question 5: According to Dow Theory, a primary trend must be confirmed by:
- Both the Dow Jones Industrial Average and the Dow Jones Transportation Average (Correct answer)
- Volume alone
- The S&P 500 index
- Moving average crossovers
Correct answer: Both the Dow Jones Industrial Average and the Dow Jones Transportation Average
Dow Theory requires confirmation between the Industrial and Transportation averages, as both must signal the same trend direction for a valid primary trend.
Question 6: Which of the following best describes a 'trading range' in market structure?
- A sustained uptrend with rising highs and lows
- A horizontal price band where support and resistance are roughly equal (Correct answer)
- A period of accelerating downward momentum
- A gap between two price bars
Correct answer: A horizontal price band where support and resistance are roughly equal
A trading range (or consolidation) occurs when price oscillates between defined horizontal support and resistance levels, indicating a balance between buyers and sellers.
CTA Market Structure & Price Theory 1
In Dow Theory, what does a 'higher high followed by a higher low' indicate?