CMT Program October 2012 Administration

Dear Candidates,

We are thrilled to announce that a completely new Level II sample exam is now available for you. We have posted the sample exam here for your use. The MTA continues to invest heavily in the CMT Program. While the program is designed for self-study, there are many materials available to support your preparation. As we pursue continuous improvement initiatives, many components of the CMT Program will be revised.

There are now over 1,250 CMT Charterholders. Each individual reflects the overall integrity of the CMT as the “Gold Standard” in technical analysis. To succeed in the highly competitive and ever-changing investment industry, investment professionals must be committed to furthering their knowledge, skills, and abilities. The MTA recognizes your lifelong commitment to learning as evidenced by your enrollment in the CMT Program. We urge you to take advantage of many other opportunities to advance your knowledge of technical analysis through our member services like the educational web series, podcast series and local chapter meetings.

As a reminder, registration and scheduling at Prometric closes for Level III on September 20th, 2012 at 5 PM EDT. We recommend that all candidates register and schedule their exam by September 20th at 5 PM EDT to ensure a seat.

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.

We hope this issue is helpful to your exam preparation and your understanding of confirmation. In our next issue we will focus on cycles.

Most Sincerely,

The CMT Support Staff

Confirmation & Divergence

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 Cain prepared this article for those who are looking to improve their performance on the Level II exam. He recently took the exam and was successful. Below are his thoughts on how best to prepare.

Studying for the CMT level II exam was a challenge and also a rewarding process.

The first thing that I recommend all CMT candidates do is read the assigned chapters and books. While this seems an obvious first step, I think it is critical and often missed. Before a candidate begins studying specific topics, creating notes or outlines, or reviewing any sample questions, you should first complete the assigned reading. I found that this provided a basic understanding of the materials. This is especially true for Perry Kaufman’s “New Trading Systems and Methods,” which is incredibly detailed and specific. Candidates attempting to gain full comprehension of each chapter in the first reading will spend an unnecessary amount of time and perhaps miss some of the meaning.

To help me prepare for the exam after I completed all the readings, I enrolled in a class given by MacNeil Curry, www.cmttestprep.com. The MTA has archived the previous CMTi classes given by MacNeil on their web-site: http://media.mta.org/videos/cmti/level2/ . These classes are current and free to all candidates. You should take advantage of these resources.

Because I had prepared the assigned readings, the classes helped reinforce key points and also highlighted areas to focus on for the exam (and what material is not as important). After listening to each class, I reviewed that topic in the text; taking notes to make sure I was comfortable with the material. Many things I did not understand completely during the first reading became clearer during this step.

The final three weeks before the exam consisted of reviewing my notes and slides from class to reinforce the important ideas and taking practice exams. These practice questions let me know that I was on track to pass. Any questions I got wrong or wasn’t familiar with on the practice exams were easily revisited through slides, text and notes.

Another suggestion is to open communication with peers and mentors throughout this process. Get to know some of your fellow CMT candidates and speak to them about the different domains within the Body of Knowledge. Explaining a concept to someone else ensures that you fully understand the material. Different perspectives and explanations from my peers were a refreshing challenge and review of the material.

Also, having a mentor that is already a CMT chartholder was helpful in especially in explaining topics and giving advice.

Studying for the CMT Exam – Level II

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

My biggest struggle was completing the required readings at the beginning of my preparation. There is so much information covered within technical analysis that the sheer quantity of material can be intimidating. I was frustrated with my slow progress at times. This is one reason I suggest simply reading the books first without taking notes or worrying about committing every concept or theory to memory. There is plenty of time to drill specific concepts once you have a broad understanding of all domains and a familiarity with the new vocabulary.

Do not study on the day of the exam, relax and stay as fresh as possible so that your performance on the exam will be your best. Reduce stress by knowing exactly where your test location is and knowing the route to get there beforehand. Remind yourself of all the hard work and dedication you have put into preparing and that you are equipped to do well. If you invested the appropriate amount of time and effort in studying, it will be reflected in your results.

- Chris Cain

Your Required Reading Counts for MTA Continuing Education Credits

By participating in the CMT Program, candidates are required to read various technical analysis books for each level of the exam. Each completed book qualifies candidates for 1 MTA Continuing Education credit. You can report your credits using the Self-Reported CE Credit Form by clicking here.

The most basic concept of confirmation and divergences is found in Dow Theory. As you recall the transportation average must confirm the industrial average as a prerequisite of agreement on direction of the market. In other words if the industrials are rallying then the transportations must rally also to confirm that the market is in a true uptrend and bullish. The same is true for a decline, if the industrials are declining then for confirmation to occur, the transportations must decline as well. Should these events not occur together or within a reasonable time of each other then, a divergence will have occurred and yes, further examination will be needed.

When we speak of confirmation and divergences we also look at volume. Does the volume confirm the move or is this not confirmed. Remember back to the head and shoulders pattern, you need to see the volume fall off on the rally from the left shoulder to the head to the peak of the right shoulder and then you would expect to see the volume flow into the market as the neckline is broken. So volume is indeed very important. We have just spoken about a confirmation and divergence in a specific pattern. Other patterns also have their rules for confirmation and divergences. Take a bull flag as an example, here again you expect to see volume as the pole is formed and declining volume as the flag is formed. If these volume changes are not there then, perhaps a review of the pattern is called for.

Flow of funds is also an indicator that can aid in illustrating the confirmation or divergence of the market direction. A technical analyst looks at the flow of funds; i.e. interest rates, Fed policy, margin debt, money market funds, new and secondary public offerings. This information helps the technical analyst understand if these actions are confirming or diverging from the information that the market is providing.

“How is a Breakout Confirmed? The first requirement for a breakout is a penetration of a previous trendline, or support or resistance zone. The next requirement is confirmation that the penetration is a real breakout, not a false one.” Kirkpatrick and Dahlquist, Technical Analysis, Chapter 13, pg. 248 (2011 2nd edition, pg. 256). A clear example of a breakout is the chart of the gold futures. Notice that this contract has been trading in a range for some time. This week, the upside resistance line was removed with a three-day rally that took the contract markedly higher.

Confirmation & Divergence

Chart provided by CQG

Chart provided by CQG

Notice on the above chart, that gold has remained in a rectangle for almost two months and that it has now (on both the weekly and the daily chart) broken out to the upside. The breakout is shy of the three percent that some authors would like to see as a confirmation. The volume does confirm this breakout and you see a break-away gap on the chart. In this pattern you could have also drawn a triangle inside this rectangle and notice that the downtrend line was challenged a number of times and that led to the break to the upside. So this action describes a break to the upside on a closing basis for both the triangle and the rectangle. What you see on the above charts are two breakout zones. The first breakout is seen when gold trades above the downtrend line, the second is seen when the horizontal line is penetrated and then finally, you see an upside gap which might be a breakaway gap.

PLEASE REFER TO CHART BELOW FOR SAMPLE QUESTION LEVEL I & II

Chart provided by CQG

Practice Questions

CMT Level I

On the above chart of silver futures identify the correct findings.

a. A bubble b. Breakout confirmed by volume c. Breakout not confirmed by volume d. A breakout not confirmed by the action of silver

Answer: b Clearly silver has broken out to the upside with confirming volume and two upside gaps. Reference: Kirkpatrick and Dahlquist, Technical Analysis, Chapters 13, 17 and 18

CMT Level II

The windows seen on this chart in August of 2012 are

a. rising windows. b. falling windows. c. runaway windows. d. breakaway windows.

Answer: a

References: Nison, Japanese Candlestick Charting Techniques, 2nd edition, Chapter 7, pg 126

Practice Questions

Edwards, Magee and Bassetti, Technical Analysis of Stock Trends, 9th edition, Chapter 12 Kirkpatrick and Dahlquist, Technical Analysis, Chapter 17, pg 370-8 (2011, 2nd edition) pg 364-9

CMT Level III

(10 Points) Combining indicators and indicator signals

Analyze the daily price chart with stochastics and RSI for Market C. For this section, focus on the price action from February 2009 to the most recent data point. (As a reminder, no credit will be given for an Elliott Wave analysis)

(2 Points) Does the disproportionate upward move for stochastics in May and June 2009 when compared to the upward price action of Market C have bullish or bearish implications for Market C? Briefly explain your answer.

(3 Points) For the RSI, identify a positive reversal and a negative reversal. Explain the implications of each (no need to calculate price targets for this part of the question).

(3 Points) For the RSI, identify any important divergences and important trend lines and the implications of each.

(2 Points) Based on your answers to the above, what is your conclusion/recommendation for Market C?

Level III Question: Chart of Market C

Reference material: Technical Analysis of the Trading Profession by Constance Brown

Guideline Answer: (2 Points) Bearish implications. On page 58 of the Brown book “If you pick up only a single notion from this book, let it be the following: When an oscillator advances or declines disproportionately to the market’s movement, you are on the wrong side of the market if you are positioned with the oscillator.” In market downtrends, oscillators will move rapidly upward as a correction develops, so when an indicator moves higher and leaves prices behind, it has a tendency to be bearish for the market or security.

Guideline Answer: (3 Points) A positive reversal off the mid March late April lows – this signal did not work and was invalidated on the break lower in the RSI in May. A Negative reversal off the late April/early May and June peaks – this pattern remains in effect and has bearish implications for Market C.

Guideline Answer: (3 Points) A negative divergence off the March and April highs – suggests underlying weakness in the market. The downtrend resistance line drawn off the February, April, and May highs – RSI broke above this trend line in late May / early June, but the negative reversal has the potential to invalidate this breakout.

Guideline Answer: (2 Points) Based on stochastics, the most recent rally appears to be a weak rally that is more in-line with an upside correction rather than a strong uptrend. The negative divergence provided a warning and appeared to overshadow the positive reversal signal highlighted above. The negation of the positive reversal has bearish implications. The break above the downtrend was encouraging, but the risk is that there is a negative reversal in place that points to lower prices for Market C.

Q. What happens if I can’t take the exam this test administration?

A. Email Marie Penza at marie@mta.org that you would like to postpone your exam to the next test administration. You must notify the MTA before the close of registration (September 20, 2012 5PM EDT). If you reschedule after the close of registration, there will be a $50 rescheduling fee.

It’s also very important that you cancel your appointment with Prometric if you have already scheduled your exam; this will free the time slot for another candidate to schedule their exam.

When registration opens for the next test administration, Marie will update everyone’s record at Prometric and send you an email stating that you can proceed to schedule your exam. Please wait for Marie’s email before attempting to schedule your exam.

Q. Will I lose the exam fee if I reschedule to the next test administration?

A. No, you will not lose the exam fee. It will be applied to the next test administration.

Q. What if I have to travel for business, can I reschedule my exam to another test center?

A. If you are a Level III candidate you must reschedule your exam before the close of registration. Level I & II candidates can reschedule up to 48 hours before the exam date. Please note that if you are taking the exam in another country, you will need to bring your passport to the test center.

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