CMT Newsletter

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Transcript of CMT Newsletter

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Dear Candidates,

This season we wanted to hear from you about the trials and tribulations of the CMT exams. In this issue we have

collected insights from past CMT candidates. You’ll hear some of the pitfalls as well as some best practices for

preparation of all three levels of the CMT. We have also reached out to one of the MTA’s longest standing members,

past president, and founder Ralph Acampora, CMT to articulate why this endeavor is so important to your career in

the field of Technical Analysis.

The MTA is a supportive and highly collaborative professional association. One way to keep an ongoing dialogue with

other technicians is to attend local chapter meetings. We have new chapters emerging in cities across the globe. Visit

the chapters page of the MTA to find a chapter near you and learn about upcoming events. If you are unable to

attend chapter meetings, there is plenty of opportunity to network and collaborate in our ‘members only’

professional network MyMTA. Be a part of the conversation by simply clicking here. After all, who better for you to

learn from than your colleagues and peers!

We hope this newsletter is helping you plan your studies for the CMT exams which will be held on May 5th (May 7th

for those of you in China (including Hong Kong), Indonesia, Japan, Malaysia, Singapore, and South Korea).

As a reminder, registration and scheduling closes for CMT Level Three on April 5th, 2012 at 5 PM. Your exam must be

scheduled at Prometric by 5 PM on April 5th, latecomers will not be able to schedule once Prometric closes

scheduling for Level Three. Registration closes for CMT Levels One & Two on April 20th, 2012. However, we urge you

to schedule your Level One & Two exam by April 5th as seats will be granted based on availability.

You may register for the CMT Exam upon joining the CMT Program. After registering, you will be directed to the

Prometric website to schedule your exam. Scheduling your exam date through Prometric is a secure process andis

done in conjunction with the MTA. To register for the CMT Exam, just follow these simple steps:

Learning from Fellow Technicians

CMT Prep Materials

Sample Question Booklets

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

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

Recommended Reading Lists

CMT Exam Level 1 CMT Exam Level 2 CMT Exam Level 3

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1. Make sure you have logged in to the MTA website.

2. Select Shopping Cart.

3. Select CMT Program & Exams

4. Select Charter Information

5. Click on the CMT Exam Level that you are eligible for

6. At the last window of the registration process, click on the Prometric link.

7. Follow the screen prompts to schedule the date and location of your exam.

8. At Prometric, to the left, select Academic, Professional, Government and Corporate Programs; then scroll down to the testing program Market

Technicians Association.

When scheduling, you will see a calendar with specific dates and times. If you do not see any dates highlighted, it means that the site is full. If convenient, please

try another site or contact Marie Penza at [email protected] or 646-652-3300.

Enjoy this issue of the CMT Newsletter. We hope it supports your studies over the coming weeks. Look for our next issue during the week of February 6th when

we will provide insight into the subject of Construction and learn about the exam grading practices from Jeanette Young and Brad Herndon.

Most Sincerely,

The CMT Support Staff

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Where is the best place to interact with fellow CMT Candidates and gain the support you need to master the material in your upcoming CMT exams? Your local

MTA Chapter Meeting!

Chapter Meetings are a very important benefit that you enjoy as a member of the MTA. You, as a member, may attend meetings of the local chapters of the

MTA anywhere in the world. Meetings are a value-added service of your membership, though there could be a nominal fee, depending on where the meeting is

held and if refreshments are served.

For example, many members travel frequently on business. If they are in the NYC area on the date of the NY chapter meeting, they will arrange to attend by

simply pre-registering on the MTA website or calling the MTA office staff. The chapters page of the MTA website will help you find a chapter near you. You also

have the members only professional network MyMTA in which to network and collaborate with other technicians. Join the conversation by simply clicking here.

Meeting with other people in our industry is an important aspect of your career development. At MTA Chapter meetings you not only have the chance to

discuss technical analysis and share best practices, but you meet other candidates and seasoned professionals. These meetings offer you the opportunity to

expand your own professional network. Also at these meetings it is likely that you will meet other candidates that are studying for the same exam. You could

form study groups to prepare for the exams. Remember it is important to meet fellow technical analysts. It is possible that some of these new acquaintances

could help you in the future. On the other hand maybe it is a good place to meet future partners or people that you might like to help.

Below you will find some words of wisdom from a candidate who overcame difficulties on the Level Three exam:

I just wanted to send you a note to thank you for the advice you gave me after I had failed my level 3 exam this time last year. You may have seen I have

just passed it at the second attempt. There is no doubt time management was critical. I remember on the first attempt I was only half way through with

an hour to go. This time I had completed everything with half an hour to spare. Thank you again for your help.

Here is another response from a candidate who successfully passed all three levels of the exam and what he did to ensure success:

What Worked & Candidate Pitfalls

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As a newly minted graduate of the CMT program, I can look back on the experience as one of the most rewarding and enriching programs that I have pursued

since entering the business, and as such, I picked up a few tips along the way that I feel can benefit those already in the program, as well as those thinking

about taking the exam series. They are as follows:

• Read the Books!!! This is above and beyond the most important (and obvious) suggestions, but it bears reiterating based on the fact that this curriculum

has been carefully and continuously honed by the CMT accreditation staff in order to properly train candidates to become excellent CMT’s. Skipping any

of it only does a disservice to yourself, as you may miss important information that can serve you well in your TA journey.

• Pace Yourself: Again, entirely obvious, but the information is extensive, thus cramming will only lead to confusion, and concepts can be more readily

assimilated when they are unfettered by the pressure of a test deadline. The review process cannot be understated, thus leave at least a couple of weeks

for this process to “tie it all together.”

• Organize: My strategy for taking these exams was to read the books carefully and to distill what I deemed as the most important concepts into chapter

notes that I kept in a loose-leaf binder. Once I completed the notes for all of the books on a given exam, I never went back to the texts during review, and

it made the studying process seem easier as it was all organized in one neat and tidy, logical order.

• Don’t Just “Accept,” See For Yourself: One strategy that helped me solidify the many concepts for each level was to test out the theories and indicators

on a real-time basis. I had the luxury of doing so, since my day job is that of a portfolio manager, but even if you don’t have these resources, there are

plenty of free platforms that allow you to utilize technical concepts. Not only do you solidify what you learn, but you are forming your technical

philosophy by experiencing what “works” or does not work for you.

• Branch Out From the Curriculum: As affiliate members, be aware of the resources that can help you in the process that are all included in your

membership. From the extensive library to the Knowledge Base to the Educational Web Series, all of these can add to your arsenal of knowledge and

preparation. Additional books (time permitting) can clarify many of the weightier topics that you might struggle with. As an example, I found John

Murphy’s book “Technical Analysis of the Financial Markets” invaluable in clarifying many of the level 1 and 2 concepts. It’s an amazingly clear and direct

read, and bolsters TA with special attention to the commodities realm, and I refer to it often in my everyday analysis.

• Get Sponsors Now: The earlier the better during the process, because you would be surprised how eager the current roster of willing sponsors is to help

guide you through the process, utilizing their expertise and experience.

• Form Study Groups: Testing your grasp of the information against others not only strengthens what you know but reveals any weaknesses you may have

that can be addressed by simply “comparing notes.” Once you become a CMT you will probably form many relationships with other analysts, so why not

start now?

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• Practice Your Technical Writing Skills: By level 3, you are expected to basically write a research report that exemplifies all of the concepts that every

level prepares you for, thus knowing how to write about is one of the most important keys to completing the series. You can never start too early in

expressing your technical opinions on paper, and I believe it is the best way to prepare you for the level 3 exam. Concentrate on clarity, accuracy and

conciseness as you develop your TA writing skills.

At the end of the day, these exams serve as the framework towards your development as a highly skilled technical analyst, but like everything in life, you get

out of it what you put in. Therefore, if you go into this program with seeing the CMT designation as the starting point, rather than the end goal to your thirst

for knowledge in TA, your ongoing journey will always be rewarded. Good Luck!

Robert Dombrower, CMT

If you have comments, strategies or other advice for your fellow CMT candidates, please send them by email to [email protected].

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THEORY & HISTORY ARE INCLUDED ON ALL CMT EXAMS

• On CMT Level One, roughly 10% of the exam (approximately 12 questions) relate to theory and history.

• On CMT Level Two, roughly 3% of the exam (approximately 4 questions) relate to theory and history.

• On CMT Level Three, theory and history related questions appear on the exam. We do not disclose the weightings for this exam.

Dow Theory

“It is built upon and concerned with nothing but the action of the stock market itself, deriving nothing from the business statistics on which fundamentalists

depend.” - Edwards, Magee & Bassetti, Technical Analysis of Stock Trends, 9th Edition, Chapter 3, pg 13

The Dow Jones Industrial Average was created as a barometer of general business trends. Today, over a hundred years after its creation, its value as a

barometer of general business trend remains effective. The Averages that were created, the Dow Jones Industrial Average, the Dow Jones Transportation

Average and the Dow Jones Utility Average, all stress the general trend of the market rather than individual stocks. These were the first indices created. Dow

believed that stocks would react in sync with other stocks and thus would rally, retreat or consolidate together. The herd mentality in action.

In an effort to set up these averages, Charles Dow chose representative stocks for his averages. He divided the indices into three parts; industrials,

transportations, and utilities. The Dow Jones Industrials reflected the industrial stocks, the Dow Jones Transportations included the rails and the Dow Jones

Utilities the utilities. All of the original averages have changed over time as business and the economy developed. Today, the Dow Jones Industrial Average not

only includes NYSE issues but also OTC issues in the Industrials. Today the transportation averages include, airlines, shipping firms, trucking firms as well as

railroads.

So, here it is: DOW THEORY!

Theory & History: Dow Theory & Efficient Market Theory

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The averages incorporate all information relevant to the stocks in the Dow Jones Averages. By all information we include both public and private information.

The value of the stock is the perceived true value of the company and is reflected in the price the stock in the market place. Fresh information is quickly

reflected in the stock’s price.

Stocks move in trends or directions. The primary direction of the trend (there are three) can be up, down or sideways. These primary trends usually last for

more than a year and will have an appreciation/depreciation of more than 20% (clearly that relates to up and downtrends because a sideways market will not be

directional). Rather than looking at the minute by minute or daily movements to discern the trend, a longer view is taken. Your job is to decide if the market is

generally going higher, lower or sideways.

How do you know the direction of the market? For a market to be in an uptrend it needs to make a higher high and a higher low. For a market to be in a

downtrend it needs to make a lower low and a lower high. Remember, these are longer term directions we are asking you to find. When you hear the Dow

Jones Industrials made a “New High” in today’s trading, that would be classified as a higher high. If the high is higher than the previous highs or, going higher

than the previous day’s high, it is also going higher but must continue in that direction to establish a trend. The opposite is true of the downtrend which would

be making lower lows.

In every trend there are retracements. A retracement is a change in direction. If you were going up, you might see a period of time when the market is going

down or sideways, and then resume their movements to the upside. These actions can easily be understood. If you owned a stock and it gained value day after

day and one day the stock just couldn’t go higher, you might just sell it so that you would not lose your profits. These sort of reversing actions are called:

backing and filling or, perhaps retreats within a general uptrend. The main direction of the market has not changed. If you were to draw a line under the price

action of the market, it will continue to point higher. Naturally the opposite is true of a downtrend. A primary trend will have an appreciation/depreciation of

more the 20%. The reactions (corrections) are called “secondary swings” in the market.

If the primary trend is to the upside it is said that we are in a “Bull Market.” If the primary trend is to the downside, we are in a “Bear Market.” Sideways

markets are not named, they are just called consolidations.

Random Walk Theory

Random Walk theory is discussed in Chapter 4 of the Kirkpatrick/Dahlquist book. This theory espouses that prices have no memory of previous prices and are

purely random in nature. “A random walk occurs when future steps cannot be predicted by observing past steps.”

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Efficient Market Hypothesis

“The EMH, which evolved in the 1960s from Eugene Fama’s Ph.D. dissertation, states that at any given time, security prices full reflect all available information.”

- Kirkpatrick/Dahlquist, Chapter 4, pg. 40.

Does this sound familiar? Well it should, as it is one of the building blocks of technical analysis. Technical analysis is cost effective! Pg. 45. Interpretation of

information in text. “Technical analysis represents a rational choice for bounded rational investors; it can allow them to make reasonably well-informed

decisions with relatively small information processing costs.” Pg. 45.

Rationality is supported by the action of arbitrageurs and irrationality is caused by irrational participants who are called “noise” players. Thus in a fluid market

you need arbitrageurs and noise to discover the correct price. “Thus, irrationality can exist in the marketplace, but it is usually nullified by rational arbitrage.”

Kirkpatrick/Dahlquist, chapter 4, pg. 45.

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CMT Level 1

A leptokurtic distribution in stock returns is characterized by

a. fat tails. b. thin tails. c. high peaks. d. low peaks.

Answer: a

“Benoit Mandelbrot (1963) first noticed this phenomenon of fat tails, called a “leptokurtic distribution” in stock returns in the early 1960s. Fat tails occur when one or more events cause stock prices to deviate extraordinarily from the mean.” Kirkpatrick and Dahlquist, Chapter 4, p. 34.

CMT Level 2

The efficient markets hypothesis states that

a. security prices fully reflect all available information

b. stock prices move in a random fashion and have no memory

c. all investors (noise players and informed traders) act rationally

d. there is a lag time between a news event on a stock and its price reaction

Answer: a

“The EMH, which evolved in the 1960s from Eugene Fama’s Ph.D. dissertation, states that at any given time, security prices full reflect all available information.” - Kirkpatrick/Dahlquist, Chapter 4, pg. 40

Practice Questions

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CMT Level 3

Describe the feedback loop theory as described by Shiller. (4 Points)

Answer:

In feedback loop theory, initial price increases lead to more price increases as the effects of the initial price increases feed back into yet higher prices through increased investor demand. The second round of price increases feeds back again into a third round, and then into a fourth, and so on. (Shiller: Irrational Exuberance, Chapter 4, pg. 60)

Sample quiz questions are available for free to the MTA membership and can be found only in the MTA Knowledge Base! To access the free CMT Preparation Materials, select the "General Principles" domain and then the "CMT Prep Materials" sub-domain. Alternatively, you can click on one of the links provided below:

1.8.01: CMT Level 1 Sample Quiz Questions

A collection of sample quiz questions to aide your study on the CMT Level 1 Exam.

1.8.02: CMT Level 2 Sample Quiz Questions

A collection of sample quiz questions to aide your study on the CMT Level 2 Exam.

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When I was a junior analyst on Wall Street in the mid 1960s, one of my tasks was the plotting of point and figure charts - this was considered by some as a very

important monitoring process but unfortunately, most thought of it as a form of “witch craft”. At first, this criticism did not bother either me nor any of the

other young chartists. However, when we all joined the New York Society of Security Analysts (NYSSA), we quickly found that we were not considered “real

analysts”. In fact, we were not included in the industry analysts’ break-out meetings – these sessions were only meant for those who used fundamental analysis

to create their research. Bottom-line, technicians were not officially recognized by the Wall Street community. It was for this reason that we started the Market

Technicians Association (MTA) – we wanted to educate ourselves and the public; and, of course, elevate technical analysis to the professional status that we all

knew it deserved. We saw this as our mission in life.

In the mid 1980s our efforts to get some technical questions on the Chartered Financial Analysts (CFA) examination fell on deaf ears. So, we did the next best

thing, we created our own set of rigorous examinations, the Chartered Market Technicians designation (CMT). Fortunately the CMT had created a respectable

track record by 2004 when the Sarbanes Oxley Law was passed; it legislated an industry wide mandate stating that all research analysts had to pass Series 86 -

the only exemption was for those analysts who had already passed Levels I and II of the CFA. This put all technicians on notice that their reports were not

deemed “recognized research.”

Well, the MTA went into high gear and on Friday, December 17, 2004, the most important date in modern technical analysis history, a small band of technicians

presented our case before a bevy of Securities Exchange Commission lawyers at the New York Stock Exchange. As a result, in March 2005, Rule 344 was

amended; there are now officially two analysts on Wall Street: one is a fundamentalist who follows companies and has a CFA and the second is a technician who

follows stocks and has a CMT. Bottom line, technical analysts are officially recognized by the Wall Street community!

In closing, I just want to say how happy I am that you are taking time out to study all of the tenets and disciplines of our beloved subject. Learn, enjoy, profit

from and share this knowledge with others. As you expand the ranks of CMT holders you will make yourselves more professional and more value added; you will

also make the ‘old guard’ of technicians so proud that we were able to play a small part in your wonderful future.

All the best,

Ralph J. Acampora, CMT

Notes from a CMT Mentor

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