Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling.

Generally, a resistance level tends to develop after a stock has experienced a steady decline from a higher price level. Technicians believe that the decline in price will cause some investors who acquired the stock at a higher price to look for an opportunity to sell it near their break-even points. Therefore, the supply of stock owned by investors is overhanging the market. When the price rebounds to the target price set by these investors, this overhanging supply of stock comes to the market and dramatically reverses the price increase on heavy volume.

Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling.

Generally, a support level will develop after a stock has experience a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock. When the price reaches this support price, demand surges and price and volume begin to increase again.

Generally, a resistance level tends to develop after a stock has experienced a steady decline increase from a higher lower price level. Technicians believe that the decline increase in price will cause some investors who acquired the stock at a higher lower price to look for an opportunity to sell it near their break-even points. Therefore, the supply of stock owned by investors is overhanging the market. When the price rebounds to the target price set by these investors, this overhanging supply of stock comes to the market and dramatically reverses the price increase on heavy volume.

When the spread between high quality and low quality bonds widens, the confidence index decreases, indicating a bearish market (and likely decreased demand for the stock).

This is the definition of the confidence index. In periods of confidence, investors sell quality bonds and buy lower quality bonds looking for yield.  Quality bond prices will fall and their yields rise.  Lower grade bond prices will rise and their yields fall.  Thus, the CI ratio will increase during periods of confidence (e.g., from 0.07/0.10 = 0.7 to 0.08/0.09 = 0.89).  Note that the CI moves in the opposite direction of yield spreads.  In periods of confidence, yield spreads narrow and the CI gets bigger.  In periods of pessimism, spreads widen and the CI falls.

This is the definition of the confidence index. In periods of confidence, investors sell quality bonds and buy lower quality bonds looking for yield.  Quality bond prices will fall and their yields rise.  Lower grade bond prices will rise and their yields fall.  Thus, the CI ratio will increase during periods of confidence (e.g., from 0.07/0.10 = 0.7 to 0.08/0.09 = 0.89).  Note that the CI moves in the opposite direction of yield spreads.  In periods of confidence, yield spreads narrow and the CI gets bigger.  In periods of pessimism, spreads widen and the CI falls.

This is the definition of relative strength. When the ratio of the stock price to the market price increases over time, the stock is out-performing the market.

Support and resistance levels.  Most stock prices remain relatively stable and fluctuate up and down from their true value.  The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers.  The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling.

Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock. When the price reaches this support price, demand surges and price and volume begin to increase again.

Breadth of market: the technician’s story in this case is that:

• The indexes represent a few large companies, not the whole market.

• The market has many medium and small companies.

• Frequently the index goes one way while smaller issues go the other. Broad market moves are moves in both the large and small companies. How do you gauge the strength of market support, i.e., the breadth of the market? Compare the advance-decline line with the market index.

The advance-decline line is a running total sum of the daily advances less the declines on the NYSE. If the advance-decline line and the index move together, it shows the movement is broadly based across the market. A divergence between the trend in the index and the advance-decline would signal the market has hit a peak or trough.

When investor credit balances are falling, investors are bullish, so contrary-opinion technicians are bearish.

The other statements are incorrect. The weak form of the efficient market hypothesis (EMH) refutes technical trading. Although an increase in margin (debit) balances in brokerages accounts means investors are bullish, it is not an indicator used by contrary-opinion technicians. This would be a bullish sign to smart-money technicians.

A put/call ratio less than 0.4 indicates that there are more calls in the market than puts. Thus, the market would be bullish and contrarians would be bearish.

If the Treasury-to-eurodollar spread widens, money is rushing into T-bills, indicating unease about future economic prospects. An increase in the confidence index (high grade bond yield/average bond yield) toward one indicates that bond investors are bullish about future economic prospects.

If the Treasury-to-eurodollar spread widens, money is rushing into T-bills, indicating unease about future economic prospects. An increase in the confidence index (high grade bond yield/average bond yield) toward one indicates that bond investors are bullish about future economic prospects.

Inflation is not an indicator of money flows. Increases in debit balances and decreases in the spread between average-quality and high-quality bonds are bullish signs to smart-money technicians.

Ratio	If the indicator is:	Investors are:	Contrarians are:
MFR	< 4%	bullish	bearish
CBOE Put/Call	≥ 0.6	bearish	bullish
Investment Advisor	≥ 60%	bearish	bullish

Increased investor credit balances in brokerage accounts (indicating a bearish trend) are a bullish sign to contrary-opinion technicians. The other statements are true and are indicators used by smart-money technicians.

Although an increase in margin (debit) balances in brokerages accounts means investors are bullish, this would be a bullish sign to smart-money technicians.

The other statements are correct. When the investment advisory ratio (bearish opinions/total opinions) is equal to or greater than 0.60, it means that investors are bearish, and contrary-opinion technicians are bullish. Investors are considered bearish if the OTC volume is decreasing relative to NYSE volume.

Although an increase in margin (debit) balances in brokerages accounts means investors are bullish, this would be a bullish sign to smart-money technicians.

The other statements are correct. When the investment advisory ratio (bearish opinions/total opinions) is equal to or greater than 0.60, it means that investors are bearish, and contrary-opinion technicians are bullish. Investors are considered bearish if the OTC volume is decreasing relative to NYSE volume.

Relative strength: When prices of an individual stock or industry change, it is difficult to tell if the change is stock specific or caused by market movements (Beta). Mathematically, if two variables are changing at the same rate, the ratio created by dividing one of the variables by the other will remain constant. This is ratio is called the relative strength ratio.

Relative Strength = Stock Price / Market Price

• If the ratio increases over time the stock is out-performing the market (a + trend)
• If the ratio declines over time the stock is under-performing the market (a – trend).

When investor credit balances are falling, investors are bullish, so contrary-opinion technicians are bearish.

The other statements are incorrect. Contrarians are bullish when OTC-to-NYSE volume is decreasing. When 70% or more of futures traders are bullish on stock index futures, contrary-opinion technicians become bearish and sell.

Summary of the indicators for contrary-opinion and smart money technicians:

Contrary-opinion technicians (trade the opposite of the mass of general investors):

• Mutual Fund Ratio (mutual fund cash/total mutual funds)
• Investor credit balances in brokerage accounts
• Investment Advisory Opinions (bearish opinions/total opinions)
• OTC (speculative) versus  New York Stock Exchange (less speculative) volume
• CBOE Put/Call ratio
• Futures traders bullish on stock index futures

Smart-money technicians (follow the professional investors):

• Confidence index (yield on high-quality bond/yield on average-quality bonds). Note: AMIR? has been known to use wording about yield spreads (which move in the opposite direction of the confidence index) to test your understanding of this indicator.
• T-bill – Eurodollar yield spreads
• Debit (margin) balances in brokerage accounts

When the CBOE put call ratio is equal to or greater than 0.50, this suggests that investors are bearish and thus contrary-opinion technicians are bullish.

The other statements are incorrect. When the mutual fund ratio is equal to or greater than 11%, it means that investors are bearish and contrary-opinion technicians are bullish. A narrowing yield spread is a bullish sign to smart-money technicians, but because it means that the confidence index has increased.

Summary of the indicators for contrary-opinion and smart money technicians:

        Contrary-opinion technicians (trade the opposite of the mass of general investors):

• Mutual Fund Ratio (mutual fund cash/total mutual funds)
• Investor credit balances in brokerage accounts
• Investment Advisory Opinions (bearish opinions/total opinions)
• OTC (speculative) versus  New York Stock Exchange (less speculative) volume
• CBOE Put/Call ratio
• Futures traders bullish on stock index futures

        Smart-money technicians (follow the professional investors):

• Confidence index (yield on high-quality bond/yield on average-quality bonds). Note: CFA Institute has been know to use wording about yield spreads (which move in the opposite direction of the confidence index) to test your understanding of this indicator.
• T-bill – Eurodollar yield spreads
• Debit (margin) balances in brokerage accounts

A point-and-figure chart includes only significant price changes, regardless of their timing or volume. The technician determines what price interval to record as signficiant and when to note price reversals.

Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling.

Generally, a support level will develop after a stock has increased in price and profit taking occurs. Technicians believe that, at some price below the recent high, other investors will buy who did not buy prior to the first price increase and have been waiting for a small price decline to buy. When the price reaches this support price, demand increases substantially and price and volume begin to increase yet again.

When the spread between high and low quality bond narrows, the confidence index increases, indicating a bullish market.

An increasing CBOE put/call ratio is a bullish sign to a contrarian.

Smart-money technicians look at:

• Confidence index (yield on high-quality bond/yield on average-quality bonds)
• T-bill – Eurodollar yield spreads
• Debit (margin) balances in brokerage accounts