CMT Program October 2012 Administration

Dear Candidates,

Technical analysis is growing in both application and repute, globally. More than ever before, employers recognize the CMT® charter and the value it brings to their institutions. Today, there are more than 1,250 CMT charterholders in 50 nations. While the CMT charter will always designate an elite group of investment professionals, the current total represents a 20% growth since January 2011. There are approximately 1,800 candidates currently in the CMT Program.

MTA members are often dual charterholders. The gold standard of technical analysis, the CMT designation, is the perfect complement to other financial designations. The CMT Program reflects a broad Body of Knowledge developed and periodically updated by active practitioners to ensure that charterholders possess knowledge grounded in the real world of today’s global investment industry. Your investment in the CMT Program will set you apart from other professionals in our industry and put you on the leading edge of our highly competitive job market.

Registration for the October 2012 Administration of the CMT Exam closes in one month and space is limited. The number of registrants already scheduled to take their exam has increased by almost 30% from this same time last year. Please sign up today to reserve your seat in your preferred time and location. For step-by-step instructions on how to register, visit http://go.mta.org/cmtsignup. If you have any questions about scheduling your exam with Prometric, please contact Marie Penza at 646-652-3300.

In this issue we want to point out a few features of the Knowledge Base (KB), the MTA’s central repository of technical analysis educational resources, which may help you in your preparation for the CMT Exam. We will also highlight some of the key points of trend analysis and provide you with three related practice questions. In the next issue we will focus on confirmation and divergence.

Most Sincerely,

The CMT Support Staff

Trend Analysis

CMT Prep Materials

Level 1: Download Level 2: Download Level 3: Download A | Download B

Sample Quiz Questions

Level 1: Set A | Set B | Set C Level 2: Set A

Archived CMT Institute Sessions

Level 1: Access archives Level 2: Access archives Level 3: Access archives

Required Reading Lists

CMT Exam Level I CMT Exam Level II CMT Exam Level III

Editor’s Note: Chris O’Connor prepared this article for those who are looking to improve their performance on the Level I exam. He recently took the exam and was successful. Below are his thoughts on how best to prepare. On May 5th2012, I successfully passed the CMT Level I on my first attempt. My professional designation test record is now 10 for 10! I am writing to the other CMT candidates to share my experience and insights regarding studying and test taking. I believe what I have to share will be beneficial to each of you during your quest to attain the CMT designation.

The first thing you need to do before starting the CMT Program is determine whether or not you can make the time commitment to complete the program. There is a substantial amount of reading – over 2,000 pages of material for CMT I alone, which is often dense and contains many new terms and concepts that take a significant amount of time to absorb. The MTA suggests planning on 100 hours of study time for level I. Most candidates would be well served to set aside even more time. It’s better to be over-prepared and confident when exam time comes, than underprepared and stressed-out.

Create a study schedule; start studying earlier than you think you need to, and plan on several weeks for review prior to the test. I started the reading four months before the exam date; the goal was to read 150-200 pages per week. That schedule left several weeks for review before the exam.

Get organized

1. Start a 3-ring binder of CMT papers; keep charts, notes, practice tests and the rest of your CMT material in it.

2. Use note cards and take detailed notes on difficult topics. Writing the material helps the learning process and the stacks of note cards you create will make for a quick and efficient review.

3. Print the title of the book as well as the page numbers on the front of each card. This way, if you have further questions, you will be able to find the information in your books quickly and easily.

4. Purchase graph paper and get hands on with point and figure charting. The concepts are not particularly difficult, but going through the process is very beneficial.

5. Take an active role in the learning process, get yourself some high quality charting software and use it daily. The CMT Program provides a course of study to learn the tools and concepts necessary to be a financial market technician. It is the duty of the candidate to master the material. Apply the information from the reading. Create and save charts with various technical indicators; draw trend and return lines, look for candlestick patterns, follow Dow Theory, etc. Utilize the skills you are learning every day and become a technician.

Studying for the CMT Exam – Level I

October 2012 Required Reading

Click on the link corresponding to the level of the Exam you are currently on to see the complete recommended reading list.

CMT Exam Level I CMT Exam Level II CMT Exam Level III

6. Drill, drill, drill. Simply doing the reading is not enough. Study all the review materials that are provided to you through the Knowledge Base on the MTA website. Watch the archived CMTi Level I review course and take all the practice quizzes and tests provided. I also recommend two additional review books, which contain repetitious questions and exercises - “Technical Analysis Explained” by Martin J. Pring and “Technical Analysis of the Financial Market”, by John J. Murphy. Focus your study efforts on the information you have difficulty retaining. Mark the questions you answer wrong, write down the correct answer, and try to answer the question again during your next study session. Also, remove note cards from your stacks once you have them memorized. This way you won’t waste time on information you already know.

The night before the exam, print directions or program your GPS for the test center and get a good night sleep. The morning of your test – eat breakfast and leave some extra time to ensure you arrive at the center on-time. Take a deep breath, relax, and begin the exam. Move quickly, but not carelessly, mark the questions you are not sure of for review and make sure to answer them before finishing the test.

Good luck!

Chris O’Connor

“Prices move in trends.” Edwards, Magee and Bassetti, Technical analysis of Stock Trends, 9th edition, Chapter 14, pg 253

The markets have three possible directions: up, down and sideways. “They may be classified as Major (Primary), Intermediate (Secondary), or Minor, according to the rules of Dow Theory, or as Horizontal Line Formations.” Edwards, Magee and Bassetti, Technical Analysis of Stock Trends, 9th edition, Chapter 14, pg 253. The first job of a technical analyst is to ascertain or discover which one of the three directions is the current direction of the issue(s) under investigation. It really is not quite as simplistic as this because the different time frames may yield different results. We could be in a strong daily uptrend inside a medium-term consolidation inside a long-term downtrend. Notice the variables here are the time frames under investigation. It would be suggested that the study begins with the long-term view and moves to the shorter time frames. In that way the trends will be discovered and identified.

“A trendline is a graphic display of the direction of the market. A valid trendline will have, at the very least, two points, peaks or troughs depending on the direction, which must be connected with a single line.” Edwards, Magee and Bassetti, Technical Analysis of Stock Trends, 9th edition, Chapter 14, pg 255. In an uptrend the troughs are connected, and in a downtrend the peaks are connected.

A trendline is more than just a line of direction; it yields lots of information about the action of the issue under investigation. It will disclose the strength or weakness of a market and the duration of that strength or weakness. “The significance of a trendline is a function of its length, the number of times it has been touched, and the angle of ascent or descent.” Pring, Technical Analysis Explained, 4th edition, Chapter 8 pg. 145.

“The size or length of a trend is an important factor, as with price patterns. If a series of ascending bottoms occurs over a 3- to 4-week span, the resulting trendline is only of minor importance. If the trend extends over a period of 1 to 3 years, however, its violation marks a significant juncture point. Just remember, big trends result in big signals, small trends in small signals.” Pring, Technical Analysis Explained, 4th edition, Chapter 8 pg. 145.

A useful tool is the use of parallel lines identifying the up/downtrend and matching that trendline with a parallel line (called the “return line”) either above, in the case of an up trending line or below, in the case of a down trending line. “This Parallel might be called the Return Line, since it marks the zone where reactions (return moves against the prevailing trend) originate. The area between Basic Trendline and Return Line is the Trend Channel.” Edwards, Magee and Bassetti, Technical Analysis of Stock Trends, 9th edition, Chapter 14, pg 268. These channels identify support/resistance and identify a range in which the issue is traveling. “Once a Trend Channel appears to have become well established, any failure of a rally to reach the Return Line (top parallel of the channel in an Intermediate Advance) is taken as a sign of deterioration in the trend.” Intermediate trend may last from three weeks to three months. Edwards, Magee and Bassetti, Technical Analysis of Stock Trends, 9th edition, Chapter 14, pg 268.

“….the difference between trendlines projected on the ordinary or arithmetic scale and on the logarithmic or ratio scale. A series of points which fall on a perfectly straight, up-sloping line on arithmetic chart paper will, when transferred to a semi logarithmic sheet, produce a curved line that rises sharply at first and then gradually rounds over.” Edwards, Magee and Bassetti, Technical Analysis of Stock Trends, 9th edition, Chapter 14, pg 257-258. This problem can be

Trend Analysis

addressed by using point and figure charts with percentage change for box size. Remember that if using a three-box reversal chart that the trendline must be 45 degrees.

CMT Level I

Traditionally the most important price point to use on daily or weekly charts is the

a. low price. b. high price. c. closing price. d. opening price.

Answer: c

Reference: Pring, Technical Analysis Explained, 4th edition, Chapter 8, pg. 138

CMT Level II

Channel lines are useful in determining

a. the strength of the trend b. targets for a breakout/breakdown c. levels at which overbought/oversold becomes obvious

Answer: a

Reference: Edwards, Magee and Bassetti, Technical analysis of Stock Trends, 9th edition, Chapter 14, pg 268

Practice Questions

CMT Level III

Question - Stock Market A (Chart 11) (10 Points)

Based on the following chart of Stock Market A, provide an analysis of the trend and chart pattern on absolute price chart (3.5 Points), an analysis of the weekly stochastics (3.5 Points), an analysis of supports and resistances on weekly stochastics is expected), and an investment conclusion/strategy for Stock Market A (3 Points). Justify each.

Answer: (3.5 Points) – Absolute price has been in an accelerating uptrend for nearly two full years, which is about half of the typical four-year cycle. So, the advance is mature. Stock Market A has been in a parabolic trend, suggesting very high risk. There could be a potential double top developing on the bar chart, but currently there is no confirmed breakdown, so it is not yet a true double top, only a potential double top. As a risk avoidance strategy, sell part of the position and place very narrow sell stop or trailing stop on the remaining shares, rather than wait for a confirmed breakdown. (3.5 Points) – Stochastics shows a serious bearish divergence in the current year by breaking down below the 77-80 zone of the February-March low. Momentum divergences often precede price moves, suggesting a probable breakdown in the developing double top on the price bar chart. 95-100 is always resistance on a stochastic chart; of course, due to the way stochastics is constructed and confined to a range of 0 to 100. It will be interesting to see if the broken support near the stochastics 77-80 zone now functions as resistance on rallies. If it does, the shorting on such rallies could become interesting and potentially profitable. (3 Points) – Investment conclusion/strategy. Recommend selling a portion of the position and placing very narrow sell stops or trailing stops on the remaining shares. Stochastics is a momentum indicator that often leads absolute price, and stochastics is looking bearish. Even if the potential double top is not confirmed on the price chart, I still would recommend funding an alternate instrument with a newer, fresher uptrend just developing, rather than looking to invest in such a mature, extended trend as seen in this absolute price chart of Stock Market A.

Many of you are already familiar with the Knowledge Base (KB), the MTA’s central repository of technical analysis educational resources. This database may help you understand a broad concept or a specific topic in your preparation for the CMT Exam. As you prepare for the CMT exam, please keep in mind that all questions are created directly from the required reading list. You should use alternate sources for deeper personal understanding only. To watch a brief video introduction about the KB click on the icon below.

The KB was designed around the MTA's Body of Knowledge and broken down into various 'domains,' each covering a key generalized topic. It is structured in such a way that those visiting a domain can gain a full understanding of that specific topic. It is completely searchable and indexed by domain for ease of use.

In addition to the written materials available, the MTA provides members and affiliates live access to the Educational Web Series several times each month. These presentations include various speakers from around the world from diverse professional backgrounds. Archived copies of many of these educational presentations are accessible in the KB. This week we encourage you to watch the Walter Murphy Jr., CFA webcast on Elliott Wave and Part 1 and Part 2 of the webcasts by Jeremy du Plessis, CMT, FSTA on point and figure charting.

The executive summary and links to each of these video presentations follows below.

MTA Knowledge Base Resources

Elliott Wave in Today's Market

On June 18th, 2009, Walter Murphy Jr., CFA presented a webcast to the MTA membership as part of the MTA Educational Web Series. His presentation on Elliott Wave in Today's Market can be seen by clicking here.

This presentation is divided into 6 parts. The first section is a simple tutorial on the basics of the Wave Principle, dealing with wave structure and wave personality. The second section deals mostly with the corrective structure of the S&P since 2000. The third section introduces Fibonacci. Part four shows Walter's counts for the S&P 500 in increasing detail from 1932-present. Given the publicity about the Coppock Curve of late, part five explains the Coppock Curve and ties it in with both the DJIA and demographics. The final section shows Walter's Elliott counts for yields, the dollar, and oil.

Walter Murphy Jr., CFA, is the Managing Partner of Walter Murphy Global Advisors, LLC. Walter has followed the financial markets professionally for 32 years. From 1984 to 2009 he was a senior technical analyst at a major Wall Street firm. Walter maintains a significant personal data base and is a recognized expert in the Elliott Wave Principle. He has a BA from the College of the Holy Cross and an MBA from Babson College. Walter also holds the CFA designation.

Using and Understanding Point and Figure, Part I

On February 24, 2010, Jeremy du Plessis, CMT, FSTA presented a webcast to the MTA membership as part of the MTA Educational Web Series. His presentation titled “Using and Understanding Point and Figure” can be seen by clicking here.

Using and Understanding Point & Figure, Part II

On September 26, 2010, Jeremy du Plessis, CMT, FSTA presented a webcast to the MTA membership as part of the MTA Educational Web Series. His presentation on Using and Understanding Point and Figure, Part II can be seen by clicking here.

Jeremy has been involved with technical analysis since 1981, and founded Indexia Research Ltd, to produce technical analysis software. He pioneered the computerization of Point and Figure charts, in particular the automation of trend & targets and the drawing of log scaled charts in the early 1980s. In 2001 the company merged with Updata Plc in London where Jeremy is now Head of Technical Analysis and Product Development. The company's software is used worldwide by major banks, fund managers and energy companies. Jeremy joined the MTA in 1987 and was awarded his CMT charter in 1997. He teaches and lectures on point and figure concepts internationally and is the author of The Definitive Guide to Point and Figure.

Q. Why doesn’t Prometric recognize my Member ID Number?

A. When entering your Member ID Number at Prometric, be sure to leave out the first four zeros and the last letter “I.” If it still doesn’t recognize your Member ID Number, it is possible that your information was not forwarded to Prometric. Please email Marie Penza at marie@mta.org and she will adjust your record so that you can schedule your exam. Another common error for new affiliate members is that they pay the CMT Program registration fee and believe this is the only fee that has to be paid for the exam. Please check your receipts from the MTA, if you do not have a receipt that says CMT Level 1 Exam or there was no link to Prometric after paying the fee, than you need to pay the exam fee before you can schedule at Prometric.

Q. What if there are no seats available at my chosen test center on the date of the exam?

A. Email Marie Penza at marie@mta.org and she will contact Prometric and get you scheduled. Once you have been scheduled, you will be sent a confirmation by Prometric.

Q. What if I lost my confirmation from Prometric and don’t have the time and location of the test center?

A. Email Marie Penza at marie@mta.org and she will look up your information and sent you your confirmation number. Once you receive that information, go to Prometric.com. At the Prometric site, select Confirm an Exam, on the following page, in the directory under K-M select Market Technicians Association; under I Want To, select Confirm an Exam then follow the prompts.

Q. If I fail the exam, do I have to pay the exam fee again?

A. Yes, the exam fee has to be paid again before you can schedule at Prometric.

Q. What happens if I don’t complete all my exams within the allotted five years?

A. Not to worry, when your five years have expired, you will be notified by the MTA and given the opportunity to re-register into the CMT Program by paying the $250USD registration fee; by re-registering into the CMT Program you will gain another five years to complete the exams that you have not already taken. You will not be required to retake the exams that you have already completed.

For more information about the CMT Program, please visit our FAQ by simply clicking here.

If you have any questions or need assistance, please don’t hesitate to contact me at marie@mta.org.

Ask the CMT Staff Frequently Asked Questions

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