Technical Analysis

 Discuss some disadvantages of technical analysis.

The problems encountered when doing a fundamental analysis of financial
statements are: (1) much of the information in financial statements is not useful; (2)
there are comparability problems for firms using alternative accounting practices;
and (3) there are important psychological factors not included in financial
statements. Also, with technical analysis it is not necessary to invest until the move to
a new equilibrium begins.

 Explain the reasoning behind a support level and a resistance level.

A support level is a price range where considerable demand is expected, while a
resistance level is a price range where a large supply is expected. Support and
resistance levels exist due to the behavior of a number of investors who are closely
monitoring the market and will trade quickly at attractive price levels. Specifically, a
support level occurs after a stock has increased in price followed by a brief period
of profit-taking at which time some investors who did not get in on the first round
decide to take the opportunity to get in. A resistance level occurs after a stock has
declined and when it experiences a recovery, some investors who missed selling at a
price peak take the opportunity to sell.
5.a. Day 4 = (13,010 + 13,100 + 13,165 + 13,080)/4 = 52,355/4 = 13,088.75
Day 5 = (13,100 + 13,165 + 13,080 + 13,070)/4 = 52,415/4 = 13,103.75
Day 6 = (13,165 + 13,080 + 13,070 + 13,150)/4 = 52,465/4 = 13,116.25
Day 7 = (13,080 + 13,070 + 13,150 + 13,220)/4 = 52,520/4 = 13,130.00
Day 8 = (13,070 + 13,150 + 13,220 + 13,130)/4 = 52,570/4 = 13,142.50
Day 9 = (13,150 + 13,220 + 13,130 + 13,250)/4 = 52,750/4 = 13,187.50
Day 10 = (13,220 + 13,130 + 13,250 + 13,315)/4 = 52,915/4 = 13,228.75
Day 11 = (13,130 + 13,250 + 13,315 + 13,240)/4 = 52,935/4 = 13,233.75
Day 12 = (13,250 + 13,315 + 13,240 + 13,310)/4 = 53,115/4 = 13,278.75

5.b. With this value for Day 13, the four-day moving average would be
(13,315 + 13,240 + 13,310 + 13,300)/4 = 57,165/4 = 13,291.25 Since the index closed
above its 4-day moving average, this would indicate a the continuation of a bullish trend.
 6. Day 1 2 3 4 5

Net advances +448 +95 +519 -499 -193

(advances minus declines)

Cumulative net +448 +543 +1062 +563 +370

advances

Cumulative including
prior month’s data +21,688 +21,783 +22,302 +21,803 +21,610