Fundamental and Technical Analysis Flashcards

An analyst observes a stock's price repeatedly falling to a certain level and then bouncing back up. In technical analysis, what is this price level called?

Answer: A support level

A support level is a price point where demand is thought to be strong enough to prevent the price from declining further. Buyers tend to enter the market at this level, causing the price to 'bounce' back up.

Which of the following statements aligns with the semi-strong form of the Efficient Market Hypothesis (EMH)?

Answer: All publicly available information, including financial statements and news, is already reflected in a stock's current price.

The semi-strong form of the EMH posits that all publicly available information is fully incorporated into a security's price. This implies that fundamental analysis, which relies on public data, cannot be used to consistently achieve above-average returns.

A fundamental analyst is evaluating a company's financial health and its ability to meet long-term obligations. Which ratio would be MOST relevant for this assessment?

Answer: Debt-to-Equity Ratio

The Debt-to-Equity ratio is a key leverage ratio that compares a company's total liabilities to its shareholder equity. It is used by fundamental analysts to gauge the extent to which a company is financing its operations through debt versus its own funds, which is a critical indicator of long-term financial risk.

According to Dow Theory, which of the following is considered a confirmation of a primary market trend?

Answer: Both the industrial and transportation averages move in the same direction, confirming each other's new highs or lows.

A core tenet of Dow Theory is the principle of confirmation. A primary bull or bear market trend is considered valid only when both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) move in the same direction and exceed previous peaks or troughs, thereby confirming each other's signals.

A technical analyst identifies a chart pattern for a stock that has been in a strong uptrend. The pattern consists of a peak (left shoulder), followed by a higher peak (the head), and then a lower peak (right shoulder). What does this 'head and shoulders' pattern typically signify?

Answer: A potential reversal of the uptrend to a downtrend

The head and shoulders pattern is one of the most reliable trend reversal patterns in technical analysis. When it appears at the top of an uptrend, it signals that bullish momentum is waning and that the trend is likely to reverse into a downtrend.

An investor is using a combined approach to select stocks. They first screen for companies with low debt-to-equity ratios and consistent earnings growth. Then, they analyze the charts of these selected companies to identify optimal entry points based on support levels and trend lines. This investor is using:

Answer: A combination of fundamental and technical analysis.

This scenario describes a blended strategy. The investor first uses fundamental analysis (evaluating financial ratios like debt-to-equity and earnings growth) to select 'what' to buy. They then use technical analysis (chart patterns, support levels) to decide 'when' to buy. This is a common approach used by many market participants.