Mixed Deck — All CTA Topics Flashcards

The 'Presidential Cycle' in US stock market analysis refers to:

Answer: The tendency for US equity markets to perform differently across the four years of a presidential term, with year 3 often being the strongest

The Presidential Cycle theory observes that US markets often follow a pattern where the pre-election year (year 3) historically shows the strongest returns as incumbents stimulate the economy.

In time series analysis of price data, what does autocorrelation measure?

Answer: The correlation between a time series and a lagged version of itself

Autocorrelation measures the correlation between a time series and its own past values at specified lag intervals, helping analysts assess price persistence.

In the context of Hurst Cycle Theory, what is a 'nominal model'?

Answer: A standardized framework of idealized cycles at various periodicities that form the building blocks of cycle analysis

The nominal model in Hurst Cycle Theory is a set of idealized cycles with specific average lengths (e.g., 40-week, 20-week, 10-week cycles) used as a reference framework for cycle analysis.

Which strategy involves diversifying investments?

Answer: Diversification

Diversification is an investment strategy that involves spreading investments across various assets, industries, and geographic regions. The goal is to reduce overall portfolio risk by ensuring that a poor performance in one investment does not severely impact the entire portfolio. This strategy helps mitigate unsystematic risk.

What is the purpose of a trading plan?

Answer: Provide structure and rules for trading

The purpose of a trading plan is to provide a clear, structured set of rules and guidelines for all trading activities. It outlines entry and exit strategies, risk management parameters, and psychological considerations, helping traders make objective decisions and avoid emotional biases. A well-defined trading plan is essential for consistency and discipline in trading.

What is the primary purpose of technical analysis?

Answer: Predict future price movements using historical data

Technical analysis is a trading methodology used to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Its primary purpose is to forecast future price direction by studying past market data. This approach assumes that historical price patterns and market behavior tend to repeat over time.

What is the main goal of risk management in trading?

Answer: Minimize losses and protect capital

The main goal of risk management in trading is to minimize potential losses and protect trading capital. This involves implementing strategies and rules to control exposure to risk, ensuring that no single trade or series of trades can severely deplete the trading account. Effective risk management is crucial for long-term survival and profitability in the markets.

In Elliott Wave Theory, what is 'wave alternation' as it applies to corrective waves?

Answer: Corrective waves 2 and 4 tend to differ in form — if wave 2 is simple, wave 4 will be complex, and vice versa

The guideline of alternation states that wave 2 and wave 4 corrections tend to differ in structure and complexity — a sharp wave 2 is usually followed by a sideways/complex wave 4.

When the majority of stocks in an index are declining but the index itself is rising, this divergence suggests:

Answer: The rally is narrow and driven by a few large-cap stocks, which is a bearish warning

A rising index led by only a handful of large-cap stocks while breadth deteriorates is a classic warning sign that the underlying market is weakening beneath the surface.

Which breadth indicator measures the percentage of stocks trading above their 200-day moving average?

Answer: The percentage of stocks above MA200

The percentage of stocks above their 200-day moving average is a breadth indicator that gauges the overall health of a market by showing how many stocks are in long-term uptrends.

What is 'distribution' in the context of volume and market structure?

Answer: Heavy volume on declining days suggesting institutional selling into rallies

Distribution occurs when institutions sell large holdings into market strength, typically showing up as high volume on declining days and low volume on advancing days.

In a linear regression channel applied to a price chart, what do the outer channel lines represent?

Answer: Price boundaries set at a specified number of standard deviations above and below the regression line

A linear regression channel draws parallel lines at a specified standard deviation distance above and below the central regression line, creating statistically-derived price boundaries.

What is a characteristic of a bullish flag pattern?

Answer: Continuation of an uptrend

A bullish flag pattern is a continuation pattern that forms during an uptrend. It appears as a small, downward-sloping rectangle or 'flag' after a sharp upward price movement (the 'flagpole'). This pattern indicates a temporary pause or consolidation in the uptrend before the price is expected to break out and continue its upward trajectory.

What trend is defined by higher highs and higher lows?

Answer: Uptrend

An uptrend is characterized by a series of successive higher highs and higher lows in price action. This pattern indicates that buyers are consistently stepping in at higher levels, pushing the price upwards over time. It signifies a period of sustained positive momentum in the market.

The concept of 'intermarket divergence' signals a potential warning when:

Answer: Two correlated markets that normally move together begin to diverge in direction

When historically correlated markets (like the S&P 500 and copper prices) diverge, it raises a red flag — one market is potentially giving a misleading signal and a resolution is likely coming.

The US Dollar Index's relationship with commodity prices (especially gold and oil) is generally:

Answer: Negatively correlated — a stronger dollar tends to push commodity prices lower

Since most commodities are priced in US dollars, a stronger dollar makes them more expensive for foreign buyers, reducing demand and typically pushing prices lower.

In Elliott Wave Theory, what are the three cardinal rules that must never be violated?

Answer: Wave 2 cannot retrace beyond wave 1's start; wave 3 cannot be the shortest; wave 4 cannot overlap wave 1's price territory

Elliott Wave's three inviolable rules are: Wave 2 never retraces 100% of Wave 1; Wave 3 is never the shortest impulse wave; Wave 4 never enters Wave 1's price territory (except in some futures).

What does a 'head and shoulders' pattern typically indicate?

Answer: Trend reversal from bullish to bearish

The 'head and shoulders' pattern is a classic chart formation in technical analysis that typically signals a significant trend reversal. Specifically, it indicates a shift from a bullish (upward) trend to a bearish (downward) trend. The pattern consists of three peaks, with the middle peak (the 'head') being the highest, flanked by two lower peaks (the 'shoulders'), all resting on a 'neckline' that, once broken, confirms the reversal.

The 'new highs minus new lows' indicator is used to:

Answer: Gauge the internal strength or weakness of a market by tracking momentum leadership

When new 52-week highs significantly outnumber new lows, it confirms broad market strength; a shift toward more new lows signals deteriorating internal market conditions.

The 'Three Inside Up' pattern is a bullish reversal pattern that combines which two patterns?

Answer: A Bullish Harami followed by a confirming up candle

Three Inside Up consists of a Bullish Harami (first two candles) followed by a third candle that closes above the first candle's high, providing confirmation of the reversal.