cmt3-sampleques

Sample Questions for CMT Level 3

C M T L e v e l 3 S a m p l e Q u e s t i o n s

Copyright © 2011 Market Technicians Association, Inc. All rights are reserved.

These sample questions are used to provide the candidate with examples of how the questions may appear

on the CMT exam. The actual CMT exam does not have any true/false questions. These sample questions

cover much of the material listed in the Body of Knowledge, while the actual exam questions may be more

difficult. In addition, these sample questions cover a variety of topics; however, the actual exam weighting

may vary.

Please note that this sample question booklet was prepared entirely separately from the actual exam to

ensure the security of the actual exam questions. In some aspects, these sample questions are designed

differently from the actual exam so as to better serve as a review for candidates. For example, many questions

and/or answers may be longer than in the actual exam so that the questions and answers serve as a review of

the material.

The MTA maintains a discussion group forum for CMT candidates on its web site. Candidates are

encouraged to utilize this resource and to discuss any areas of the Body of Knowledge with which they are not

familiar.

This book of practice exams is produced by:

Market Technicians Association, Inc.,

61 Broadway, Suite 514

New York, NY 10006

All material is believed to be reliable at time of publication, but not guaranteed. The Market Technicians

Association, Inc., and its officers, assumes no responsibility for errors or omissions.

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Question 1: Ethics (30 points) Please discuss what, if any, violation has occurred in each of the following statements. During a recent interview with Forbes, Arteau Deteau, CMT was asked to comment about his outlook on the stock market, his recent market commentary and several stock picks.

1A. “I have special insight into the market,” Mr. Deteau told the interviewer, “the kind possessed by only a very few people.” (5 points) 1B. During the course of the interview, Mr. Deteau said, “I generally don’t use the CMT designation on my written pieces. It would distract from the work I’ve done.” (5 points)

1C. “The worst job I ever had,” the interviewer was told, “was with that hot hedge fund. The place is a mess. The MDs can’t keep their private lives under control and the drugs are just rampant. You can’t imagine the losses they sustain daily.” (5 points)

1D. “I’ve read analysis by Cee Threpio. I can’t believe that guy gets paid for writing that garbage.” (5 points)

1E. “Although the technicals really don’t merit it, I’m bullish on ABC. Friends of mine tell me that the company is on the block and a deal is likely any day now. I’m publishing a report later today that will pump this dog up and then I’ll dump whatever I own. .” (5 points) 1F. “You know, I could do a lot for your circulation. Why don’t I give you the Membership list for the MTA and you can prospect it?” (5 points)



Question 2: Intermarket Analysis (40 Points) Part A (30 points): Analyze the patterns on the following three charts. Identify the one dominant formation on each chart. Your answer must include the name of the formation, the start and end date for each formation, a price target and the formula used to calculate the price target. Points will only be awarded for complete answers. Points will not be awarded for Elliott wave or Fibonacci analysis. Chart #1 (10 points) Composite Interest Rate Yield Index

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Chart #2 (10 points) Composite Equity Price Index

Chart #3 (10 points) Composite Commodity Price Index



Part B (10 points):

2B.1 (5 points) What is the current stage of the cycle? 2B.2 (5 points) Assuming the three asset classes rotated according to the classic business cycle model, what is your 12 month outlook for these three asset classes?

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Question 3: Candlestick Analysis (60 Points) Part A: Chart Analysis (36 points) Your firm allocates equity capital across global markets. You have been asked to give a technical opinion whether any or all of the three markets (US, India and Brazil) should be over‐weighted or under‐weighted in the portfolio. Base your analysis on the recent significant candlestick formations, price relative to the moving averages, the 14 week stochastic and the indices relative price strength. Note, these are weekly charts, the moving averages are 10 and 40 periods, and the relative price strength is to the EAFE index. Answer: Note to graders: More than 12 points have been identified in each of the answers. Maximum point total for each response is still 12 points. 3A.1 Bombay Sensex Index, Chart #4 (12 points)



3A.2 Bovespa Index, Chart #5 (12 points)

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3A.3 Standard & Poors 500 Index, Chart #6 (12 points)

B: Candlestick Pattern Identification (24 points) Identify and explain the significance of the following six candlestick patterns within the ovals, (2 points) AND briefly explain how each pattern is significant. (2 points)



3B.1 Bombay, Chart #7 (4 points)

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3B.2 EAFE, Chart #8 (4 points)



3B.3 AAON Corp., Chart #9 (4 points)

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3B.4 Abbott Labs, Chart #10 (4 points)



3B.5 Aflac, Chart #11 (4 points)

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3B.6 Gartner Group, Chart #12 (4 points)



Question 4: Strategies & Techniques in Technical Analysis (35 points) Advanced analysis using momentum indicators, oscillators, trend lines, and support and resistance – Please note that no credit will be given for an Elliott Wave analysis on any part of question 3

Part A: Drawing Trend Lines (5 points)

Which uptrend line, Uptrend Line A or Uptrend Line B, is the more valid uptrend line for Kansas City Southern (KSU)? (1 Point)

Why is Uptrend Line A or Uptrend Line B the more valid uptrend line for Kansas City Southern KSU? Full credit will only be given for addressing both the price and volume in the chart provided. (4 Points)

Chart #13, Question 4A

Source: Bloomberg

Kansas City Southern (KSU) – daily bar chart

Daily volume

Uptrend line B

Uptrend line A

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Part B: Using RSI signals to generate a pairs trade idea (14 points) Chart #14, #15, and #16 You work at a hedge fund and help generate pairs trading ideas in large cap stocks based on technical analysis. In a pairs trade an investor goes long one stock and short another stock and expects the long stock position to outperform the short stock position. Using the three charts provided, generate a pairs trade idea for Stock A and Stock B. The charts provided are 1) the weekly chart of Stock A relative to Stock B, 2) the daily chart of Stock A, and 3) the daily chart of Stock B. Your fund’s preferred technical indicator is the RSI and all three charts have a 14‐period RSI. Chart #14, Question 4B

Source: Bloomberg

Stock A vs. Stock B – weekly chart

14‐week RSI



Chart #15, Question 4B

Source: Bloomberg

Chart #16, Question 4B

Source: Bloomberg

14‐day RSI

14‐day RSI

Stock A – daily closing prices

Stock B

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Based on your analysis of the three charts, state your pairs trade strategy for Stock A and Stock B. (2 Points)

Long: Short:

Justify and support your pairs trade strategy using bullet points (one or two sentences maximum for each bullet): Four bullet points for the weekly chart of Stock A vs. Stock B (4 Points), Four bullet points for the daily chart of Stock A (4 Points), and Four bullet points for the daily chart of Stock B (4 Points). Be sure to address the both price and RSI for each of the three charts in your response. (Total 12 Points)

Pairs trade strategy bullet points Weekly chart of Stock A relative to Stock B

1) 2) 3) 4)

Daily chart of Stock A

1) 2) 3) 4)

Daily chart of Stock B

1) 2) 3) 4)

Part C: Reversal signals and supports and resistances using the Relative Strength Index (RSI) (10 points) 4C.1 ‐ You work on a proprietary trading desk and have identified a potential intermediate‐term buy signal in Market A. Use the monthly price chart with 14‐month RSI and the data sheet provided to establish an upside price target for Market A using the positive reversal technique. State your answer out two decimal places. To receive partial credit for an incorrect answer, show your work. (4 Points)



4C.2 ‐ Some of the traders do not agree with your recommendation to buy Market A. Their primary concern is that monthly RSI peaked in 1982 and did not reach new highs along with Market A in 1983 and 1984, setting up a potential negative divergence. They also say that Market A has become overextended on the upside. Use your knowledge support and resistance levels on RSI to support your “Buy” case for Market A. (4 Points) Using the RSI, what signal would invalidate the positive reversal signal for Market A? (1 Points) What is an appropriate stop loss on Market A should your “Buy” recommendation on Market A not work out? (1 Point) Chart #17, Question 4C

Source: Bloomberg

Market A – monthly bar chart

Market A – 14‐month RSI

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Chart #18, Question 4C



Part D: Volatility bands on Oscillators (6 points) The manager of your trading desk is looking for other ways to use oscillators to generate buy and sell signals to trade individual common stocks. Your manager shows you a daily chart of Dupont Co. (DD) with volatility bands around a 14‐day RSI and would like to know if overlaying volatility bands on RSI can be used to generate trading signals. Chart #19, Question 4D

Source: www.stockcharts.com

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Describe how volatility bands around an RSI are used to generate buy and sell signals for the underlying security? (4 Points)

Is it necessary for a divergence between the RSI and price to accompany buy and sell signals using RSI and volatility bands? (1 Point)

Based on volatility bands and RSI, when did the most recent signal for DuPont (DD) occur? Based on this signal, are you long or short DD? (1 Points)



Question 5: Elliott Wave (25 points) Chart #20

Please note: 1) the weekly chart of BHP for this question is in log scale and 2) the points labeled with a price are for reference only and do not signify a particular Elliott point. Starting at the September 1998 low at $6.25 and continuing to the end of the data: 5A.1 ‐ Identify the primary degree waves by using the price points noted on the chart of BHP. (5 points) 5A.2 ‐ Describe the secondary degree wave patterns within the primary degree waves and list the Elliott wave rules and guidelines and any Fibonacci ratio relationships you used in determining your primary degree wave counts. (Base your counts on whatever information is available. In real world analysis, you would have access to shorter time‐frame charts to confirm counts, but that is not possible here.) (15 points)

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5A.3 ‐ As an analyst, what action do you recommend now? (5 points)

Question 6: Point and Figure (30 points) See Charts # 21, #22, & 23 You have been called back for a second job interview with Franconia Notch Asset Management Corporation. You are interviewing for the position of Market Strategist. You meet the firm's Chairman and Chief Investment Officer in a conference room and after some discussion she presents you with three charts. Based on these three charts you must decide whether you would recommend over‐weighting commodity prices for the next three months. She informs you that you must base your recommendation on evidence contained only in those three charts and your own knowledge and experience. She will be back in 15 minutes to hear your recommendation and explanation. The three charts are:

Chart #21 S&P 500



Chart #22 Goldman Sachs Commodity Index

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Chart #23 US 10 Year Yield

Part A (10 points): 6A.1 ‐ The S&P 500 is in a short term downtrend. At what price level did it break down? Chart #21 (5 points) 6A2: The Goldman Sachs Commodity Index is in a short term uptrend. At what price level would it break down? Chart #22 (5 points) Part B (20 points): 6B.1 ‐ Should commodity prices be over‐weighted? Answer "Yes" or "No" only. Chart #21, #22, & #23 (11 points) 6B.2 ‐ List the three most important factors in reaching your decision. (3 points each Total of 9 points)

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Question 7: Behavioral Finance (20 points) 7A: As discussed by Shiller, what statistical (systematic) evidence exists of asset mispricing (it is not necessary to mention the author names behind the academic studies)? (5 points) 7B: As discussed by Shiller, what two items make up the bulk of most people's wealth? How is diversification and hedging defined within this context? Why hasn't the public embraced these concepts and what must happen in order for that to change? (6 points) 7C: Of the 12 precipitating factors to the stock market bubble of the 1990's discussed in the book Irrational Exuberance, what 2 did author Robert Shiller think would likely increase in strength into the 21st century and which 2 would likely decrease? (4 points) 7D: In terms of investor expectations and emotions, what is the dominant factor in how one feels about the future of asset prices? For someone who missed out on a big market move, what emotions would drive their decision making? What emotions drive the future decisions of someone who participated in a big market move? (5 points)



Answer Key Question 1: Ethics 1A – Code 2: “Members and Affiliates shall not publish or make statements which they know are or have reason to believe are inaccurate or misleading. Members and Affiliates shall avoid leading others to believe that their technically‐derived views of future security price behavior reflect foreknowledge rather than estimates and projections subject to reexamination and, as events may dictate, to change.” Code 3: Members and Affiliates shall not publish or make statements concerning the technical position of a security, a market or any of its components or aspects unless such statements are reasonable and consistent in light of the available evidence and of the accumulated knowledge in the field of financial technical analysis.” 1B – Code 9: “Members who have earned the CMT designation shall use CMT after their name whenever and wherever appropriate.” 1C – Code 6: Members and Affiliates shall keep in confidence knowledge concerning the lawful private affairs of both past and present clients, employers, and employer’s clients.” Code 1: Act with dignity and in an ethical manner. 1D – Code 4: Members and Affiliates shall not publish or make statements which indefensibly disparage and discredit the analytical work of others. 1E – Code 2: Members and Affiliates shall not publish or make statements which they know or have reason to believe are inaccurate or misleading. Members and Affiliates shall avoid leading others to believe that their technically‐derived views of future security price behavior reflect foreknowledge rather than estimates and projections subject to reexamination and, as events may dictate, to change. Code 3: Members and Affiliates shall not publish or make statements concerning the technical position of a security, a market or any of its components or aspects unless such statements are reasonable and consistent in light of the available evidence and of the accumulated knowledge in the field of financial technical analysis. “ 1F – Code 1: Member and Affiliates shall not unduly exploit their relationship with the Association for commercial purposes, nor use, or permit others to use, Association mailing lists for other than Association purposes.

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Question 2: Intermarket Analysis Part A:

Chart #1 (10 points) Composite Interest Rate Yield Index Formation: Rectangle Target: 50 Start Date: September 2000 End Date: February 2001 Formula: (Formation High 40 ‐ Formation low 30) 10 + (Formation High 40) = 50 Chart #2 (10 points) Composite Equity Price Index Formation: Head & Shoulders Target: 700 Start Date: January 2000 End Date: March 2001 Formula: (neckline 1000) ‐ (Head 1300 – Neckline 1000) 300 = 700 Chart #3 (10 points) Composite Commodity Price Index Formation: Descending Triangle Target: 50 Start Date: June 2001 End Date: Not Complete (October 2001) Formula: (Triangle Bottom 60) ‐ (Formation High 70 ‐ Formation low 60) 10 = 50

Part B:

2B.1 – Stage 5 Bonds Falling / Stocks Falling / Commodities Rising 2B.2 – Assuming the three asset classes rotated according to the classic business cycle model, what is your 12 month outlook for these three asset classes. Commodities will fall, bonds will rally, stocks will rally commodities will rally.



Question 3: Candlestick Analysis 3A.1 Bombay Sensex Index, Chart #4 (12 points)

The index is in an upward sloping channel defined by a lower trend line across the October 2009, Feb 2010 and May 2010 lows and an upper trend line drawn across the Sept 2009, Jan 2010 and April 2010 highs (1 pt). The October and May lows have bullish hammer formations (2 pts.) The Sept. 2009 high has a dark cloud cover (1 pt) pattern while the Jan 2010 peak has both a shooting star and a hanging man candle (2 pts.) The most recent candle is a potential shooting star, awaiting confirmation (1 pt.) Major resistance is found near the 19,000 level where the falling window occurred in late 2007 (1 pt.) The 10 week moving average remains above the 40 week moving average and is attempting to turn up (1 pt.) The stochastic oscillator is on a buy signal generated from a bullish 40 level (1 pt.) Additionally, the oscillator displays a bullish convergence with price (1 pt.) Relative price is in an upward sloping channel (1 pt) with the lows drawn across the lows of April 2007, June 2008 and Jan 2009. The upper return line is drawn across the highs of Jan 2008 and June – July 2009. Relative price is at a new high (1 pt.) Based upon the positive price, stochastic and relative price, the Sensex should be over‐weighted in the portfolio (1 pt.)

3A.2 Bovespa Index, Chart #5 (12 points)

The index has formed a rounding top (1 pt) (NOT dumpling top – no falling window – no points for dumpling top) confirmed by the trend line break (1 pt) in May. In April, there is a spinning top candle (1 pt) inside a tower top (1 pt.) The May low has a hammer formation (1 pt.), while the most recent candle is a shooting star from just below the 40 week moving average (resistance) (1 pt.) The 10 week moving average has cut below the 40 week moving average forming a death cross. (1 pt.) The recent top has been formed just below the all‐time high in May‐June 2008, which is major resistance (1 pt.) Note the stochastic oscillator formed a bearish divergence (1 pt) into the rounding top as well as confirming the recent price low by making a lower low (1 pt.) Relative price strength remains in an uptrend (1 pt), but is currently in what appears to be an ascending wedge formation (1 pt) which has bearish connotations. The pattern is not yet complete as the lower trend line has not been violated. Based upon the negative price action, divergences and deep reading in the stochastic and potentially bearish relative strength pattern, the Bovespa should be under‐weighted in the portfolio (1 pt.)

3A.3 Standard & Poors 500 Index, Chart #6 (12 points)

The index has broken an uptrend in May (1 pt.) This is after price stopped at major resistance formed by a converging overhead resistance trend line, the falling window in October 2008, and the Fibonacci 0.618 retracement of the bear market (3 pts.) Additionally, price has formed an apparent 3 Buddha top formation (as this is a candlestick question, candidates must give 3 Buddha top response, NOT head and shoulders), pending the break of resistance (neckline in western TA.) (1 pt.) Note the shooting star in May below the 10 week ma, suggesting this ma is now formidable resistance (1 pt.) While the most recent candle looks like a bearish engulfing pattern, the advance from the recent low is very small (1 pt.) The 10 week moving average also provided resistance in the last week (1 pt.) While it remains above the 40 week moving average, the drop‐off values over the next few weeks strongly suggest it cut below the 40 wk ma forming a death cross (1 pt.) The stochastic oscillator is on a buy signal yet it made a lower low while price had not yet broken to a lower low, creating a bearish divergence (1 pt.) Relative price strength has formed a small double top (1 pt) just below the December 2009 peak. Additionally, a down trend can now be drawn from the December 2009 peak across the two peaks of the double top (1 pt.) Based upon the negative price action, negative stochastic behavior and apparent failure of relative price strength at the previous peak, the S&P 500 should be under‐weighted in the portfolio (1 pt.)

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3B.1 Bombay, Chart #7 (4 points)

Abandoned Baby Bottom (2 pts); This is a special morning star formation where the middle candle is the equivalent of an island bottom. As price gapped lower between the first and second candle, an apparent strong negative signal is given. As price gapped back up in the third candle the bulls wrest control from the bears. (2 pts)

3B.2 EAFE, Chart #8 (4 points)

Three Black Crows (2 pts); The three black crows presage lower prices if they appear at high prices or after a mature advance. (2 pts)

3B.3 AAON Corp., Chart #9 (4 points)

Upgap Side‐by‐Side White Lines (2 pts); During a rally an upward gapping white candle followed by another white candle of similar size is a bullish continuation pattern. (2 pts)

3B.4 Abbott Labs, Chart #10 (4 points)

Falling Three Methods (2 pts); A bullish continuation pattern, this formation is a rest from the battle ,ie, a small consolidation. (2 pts)

3B.5 Aflac, Chart #11 (4 points)

Dumpling Top (2 pts); This is a top reversal usually with small real bodies as the market creates a convex pattern. Confirmation comes when price forms a falling window. (2 pts)

3B.6 Gartner Group, Chart #12 (4 points)

Tower Top (2 pts); This pattern unfolds at high price levels. After a rally, a lull occurs followed by a large black candle. The formation appears to have towers on each end, hence the name. (2 pts)



Question 4: Strategies & Techniques in Technical Analysis

Which uptrend line, Uptrend Line A or Uptrend Line B, is the more valid uptrend line for Kansas City Southern (KSU)? (1 Point)

Uptrend Line A

Why is Uptrend Line A or Uptrend Line B the more valid uptrend line for Kansas City Southern KSU? Full credit will only be given for addressing both the price and volume in the chart provided. (4 Points)

According to Constance Brown, dominant trend lines are not always drawn from extreme price highs or lows. Trend line should start from the price extreme that is behind the key reversal or spike rather from the actual price low or high. Volume can be used as a measure of whether a security has shown a key reversal or spike high or low. Trend lines should not be drawn at these extremes. Uptrend line A on KSU connects the lower volume price lows before the higher volume reversal lows in Sep/Oct 2009, Nov/Dec 2009, and Jan/Feb 2010. This trend line shows the congestion areas on the chart better than Uptrend B, which may just show the tendency of the crowd to panic.

Source: Bloomberg

Kansas City Southern (KSU) – daily bar chart

Uptrend line B

Uptrend line A

Daily volume

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Part B: Using RSI signals to generate a pairs trade idea Reference material: Technical Analysis of the Trading Profession by Constance Brown: pp 3‐18, 121‐141.

Based on your analysis of the three charts, state your pairs trade strategy for Stock A and Stock B. (2 Points)

Long: Stock B Short: Stock A

Justify and support your pairs trade strategy using bullet points (one or two sentences maximum for each bullet): Four bullet points for the weekly chart of Stock A vs. Stock B (4 Points), Four bullet points for the daily chart of Stock A (4 Points), and Four bullet points for the daily chart of Stock B (4 Points). Be sure to address the both price and RSI for each of the three charts in your response. (12 Points) Pairs trade strategy bullet points Weekly chart of Stock A relative to Stock B

1. Stock A remains in a downtrend relative to Stock B that appears set up to continue. This downtrend has been in place since 2002 and Stock A shows no major signs of a bottom vs. Stock B.

2. A negative reversal signal for the RSI off the late 2008 and early 2009 peaks supports the case for additional weakness for Stock A relative to Stock B

3. RSI is weak and breaking supports from early 2010 and early 2009. 4. RSI is at risk for breaking an uptrend support line from mid‐2006. 5. Stock A is breaking below a short‐term uptrend vs. Stock B, pointing to additional weakness for Stock A relative

to Stock B. The pattern appears to be a bearish head and shoulders continuation pattern. Daily chart of Stock A

1. Stock A has a double top in place off the $31 area highs and is breaking to new near‐term lows. 2. RSI for Stock A shows a strong negative reversal from the May and June 2010 highs. This supports the case for

more weakness in Stock A. 3. RSI for Stock A stalled at resistance near 50, which is the prior low for the RSI from March/April 2010 low.

Stalling below 50 on the RSI indicates a weakening pattern for momentum. 4. RSI for Stock A appears to be entering a bearish support and resistance zone. 5. RSI for Stock A has a short‐term uptrend line break. The uptrend for RSI is drawn off the late May / early June

2010 lows. Daily chart of Stock B

1. While Stock B has a weak price pattern, the price chart is somewhat stronger than Stock A. Stock B does not have a double top and is not breaking to fresh near‐term lows.

2. While Stock B also shows a negative reversal off May and June 2010 highs, the RSI for stock B shows a short‐term bottom. This bottom in the RSI shows a breakout and a retest of the breakout, which has the potential to be bullish short‐term.

3. RSI for Stock B is holding short‐term uptrend support. Stock A broke its short‐term uptrend support. 4. On a short‐term basis, RSI for Stock B is rising, while RSI for Stock A is falling. 5. While Stock B also shows signs of weakness on its daily price and RSI chart, the pattern is generally more

constructive for Stock B than Stock A. This suggests that Stock B should outperform Stock A



Part C: Reversal signals and supports and resistances using the Relative Strength Index (RSI) Reference material: Technical Analysis of the Trading Profession by Constance Brown: pp 3‐18, 121‐141. You work on a proprietary trading desk and have identified a potential intermediate‐term buy signal in Market A. Use the monthly price chart with 14‐month RSI and the data sheet provided to establish an upside price target for Market A using the positive reversal technique. State your answer out two decimal places. To receive partial credit for an incorrect answer, show your work. (4 Points) 135.51 + (128.22 – 117.36) = 146.37

Close on second RSI low: 128.22 Close on first RSI low: 117.36 -10.86 difference between lows Close on middle RSI peak: 135.51 146.37 price target from +reversal

DATE OPEN HIGH LOW CLOSE RSI May-1984 132.95 135.06 132.10 133.69 66.17 Apr-1984 128.36 132.64 128.36 132.64 65.08 Mar-1984 128.68 129.97 126.18 128.22 60.05 Second "lower" RSI Low Feb-1984 134.65 134.65 128.25 128.25 60.11 Jan-1984 133.19 136.15 133.19 135.51 75.53 RSI high between the two peaks Dec-1983 130.78 134.05 130.78 131.79 72.13 Nov-1983 129.23 131.36 128.90 130.64 70.97 Oct-1983 128.15 128.44 126.21 128.40 68.61 Sep-1983 130.74 130.77 128.35 128.35 68.56 Aug-1983 129.68 131.94 128.09 130.84 74.37 Jul-1983 124.98 128.44 124.98 128.44 72.26 Jun-1983 124.68 126.21 124.25 124.94 68.80 May-1983 122.04 123.79 120.90 123.79 67.56 Apr-1983 122.27 122.43 121.14 122.39 66.04 Mar-1983 120.79 122.65 118.97 122.21 65.85 Feb-1983 120.99 122.28 118.02 120.35 63.89 Jan-1983 116.97 121.12 115.43 121.12 65.33 Dec-1982 121.03 121.45 117.05 117.36 61.40 First "higher" RSI Low Nov-1982 124.36 126.02 121.00 121.00 68.37 Oct-1982 122.14 124.78 121.23 124.78 76.77 Sep-1982 120.03 122.76 118.78 122.20 74.80 Aug-1982 117.80 121.41 116.95 120.29 73.25 Jul-1982 119.33 121.06 116.12 119.05 72.22 Jun-1982 113.71 120.47 113.25 119.04 72.21 May-1982 111.51 112.79 109.70 112.79 66.61 Apr-1982 114.16 115.36 111.60 111.60 65.38 Mar-1982 111.96 114.73 110.28 114.73 71.86 Feb-1982 109.32 111.93 109.14 111.93 69.33 Jan-1982 104.62 108.78 104.62 108.03 65.30 Dec-1981 103.65 106.46 103.37 104.69 61.25 Nov-1981 104.99 105.35 103.18 103.18 59.26 Oct-1981 107.57 108.65 103.86 106.13 65.37 Sep-1981 110.76 110.76 103.84 107.73 68.95 Aug-1981 114.03 114.88 110.01 110.28 75.03 Jul-1981 108.52 111.72 108.52 111.72 78.67

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Some of the traders do not agree with your recommendation to buy Market A. Their primary concern is that monthly RSI peaked in 1982 and did not reach new highs along with Market A in 1983 and 1984, setting up a potential negative divergence. They also say that Market A has become overextended on the upside. Use your knowledge support and resistance levels on RSI to support your “Buy” case for Market A. (4 Points)

Market A is in a strong uptrend and could very well be overextended, but using the RSI as a guide shows that a bullish support level near 60 is holding. Support on the RSI is at the lows from 1983, 1982, and 1981 as well as at the high from 1976. This suggests that the uptrend for Market A is intact. While there are negative divergences on the chart, they are not yet confirmed by price weakness or a breakdown in the RSI. RSI breaking support at the 60 level would provide some evidence that the bearish divergences are starting to weigh on Market A. But at the point when the chart is drawn, the benefit of the doubt is on the upside since RSI and price supports are holding. The message from RSI is that the uptrend is intact for Market A with additional upside expected.

Using the RSI, what signal would invalidate the positive reversal signal for Market A? (1 Points)

The following is the only answer to accept and is straight from the Connie Brown text: A price objective is negated when the RSI violates the trend line that connects the two momentum levels that are used to calculate the differential for the price objective. In this case, it is the trend line that connects the RSI lows from late (December) 1982 and early (March) 1984.

What is an appropriate stop loss on Market A should your “Buy” recommendation on Market A not work out? (1 Point)

An appropriate stop loss is below the recent lows near 128. Also acceptable is a stop on a close below last month’s open – this would suggest a monthly bearish engulfing pattern. Also acceptable is a stop on a close below last month’s low – this would place an outside month down. Both the bearish engulfing pattern and outside month down would be warning signals.

Part D: Volatility bands on Oscillators Reference material: Technical Analysis of the Trading Profession by Constance Brown: pp 239‐250. Describe how volatility bands around an RSI are used to generate buy and sell signals for the underlying security? (4 Points)

Page 241 of Technical Analysis of the Trading Profession by Constance Brown. Look at the upper and lower extreme ranges for the RSI. When the RSI is near an extreme high or low and is touching the volatility band, the indicator will follow the strong move with a pullback from the band. The market signal occurs when the RSI attempts to resume the former trend and fails to challenge or reach the outer band a second time. At extreme highs, a failure of the RSI to touch the upper band generates a sell signal. At extreme lows, a failure of the RSI to reach the lower band triggers a buy signal.

Is it necessary for a divergence between the RSI and price to accompany buy and sell signals using RSI and volatility bands? (1 Point)

Page 241. It is not necessary to have a divergence.



Based on volatility bands and RSI, when did the most recent signal for DuPont (DD) occur? Based on this signal, are you long or short DD? (1 Points)

May 2006. Bearish.

Question 5: Elliott Wave 5A.1 –

Waves of primary degree of trend: 5 points ( 1 each) Wave 1 – 6.25‐13.81 Wave 2 – 13.81‐7.57 Wave 3 – 7.57‐87.23 Wave 4 – 87.23‐24.63 Wave 5 – 24.63‐ unclear at this time, Wave 5 is likely not complete yet.

5A.2 –

Secondary wave patterns – 15 points (3 each) Wave 1 is composed of a clear pattern of 5 waves with wave 3 extended. Wave 2 is a zig‐zag with wave B a complex double zig‐zag that retraces .618 percent of wave A. Also wave C is almost equal in length to wave A. The whole of Wave 2 does not break the low of wave 1 (RULE – WAVE 2 CANNOT BREAK BELOW THE START OF WAVE 1). Wave 3 is a 5 wave pattern with wave 3‐1 from 7.57‐13.02, wave 3‐3 from 8.90‐30.84, and wave 3‐5 from 23.39 to 87.23. The length of wave 3‐5 is just over 2.618 times the distance from the beginning of wave 3‐1 to the end of wave 3‐3, so Wave 3 is extended and within Wave 3, wave 5 is extended. Within Wave 3, a line drawn from the end of wave 3‐3 that is parallel to a line connecting the lows of wave 3‐2 and wave 3‐4 provides an objective for the end of Wave 3. (RULE – WAVE 3 CAN NEVER BE THE SHORTEST) Wave 4 (alternating with the zig‐zag of Wave 2, guideline) is an expanded flat with the high of wave B exceeding the beginning of wave 4. Both waves A and B of Wave 4 are simple zig‐zags with wave B retracing almost 1.382 times wave A. Wave C is a 5 wave pattern ending in the area of the wave 4 of lesser degree. (RULE ‐WAVE 4 DOES NOT BREAK THE TOP OF WAVE 1) The wave count for Wave 5 is unclear. It is possible that what we are labeling as Wave 5 could still be part of Wave 4. It is not a diagonal fifth wave because it does not appear that wave 4 is dipping into the area of wave 1. Because the last push up to the 83.15 area appears to have been a five count wave, that may signal the end of the entire move in a truncated fifth wave.

5A.3 –

Recommendation: 5 points As an analyst, we recommend being on the sidelines at this time. The momentum is clearly slowing as price meets strong resistance in the area of the highs. Risk is much higher now than at the beginning of Wave 3 up. The most likely move from here is to the downside.

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Question 6: Point & Figure Part A:

In this case: S&P shows a huge top. Goldman Sachs Commodity Index is in a strong uptrend. US 10 Yr Yield shows a huge top (strong bond market expected as yields drop).

6A1 –

This is a 1box chart. The breakdown occured when the Os at 1420 are broken by a posting at 1410. The only correct answer is 1410.

6A2 –

The only correct answer is 220. (du Plessis, The Definitive Guide to Point and Figure). This is a 3box chart. The breakdown will occur if prices fall below the last column of Os (a Double Bottom pattern). The break of the 45 degree Bearish Support Line (not shown, but assuming the test taker drew one in) does not result in a breakdown

Part B 6B1 – No 6B2 –

Acceptable factors for credit: 1) Bonds yield has broken out to the downside. Bond Prices and Commodities trend in opposite directions. 2) The S&P shows a major break down. Commodities follow the lead of stocks. 3) Bond and Stock prices trend in opposite directions. This is true in this example as bonds have broken out to the downside (bond prices to rally) and the S&P has broken down. This reinforces the potential for weakness in commodities. Key Elements: Bonds and commodities trend in Opposite Directions (Murphy Intermarket, pg 116) Bonds and stock prices trend in opposite directions (Murphy Intermarket, pg 119) Commodities follow the lead of stocks (Murphy Intermarket, pg 117) Explanation: On the surface it appears that one should answer "Yes", overweight the GSCI because it is in a strong rising trend. But looking beyond the GSCI chart there are several inconsistencies that argue against relying on the GSCI chart alone. 1) Murphy tells us that Bonds and Commodities trend in opposite directions. That means rising commodities should be accompanied by falling bond prices. However, the 10 year Explanation: A1: This is a 1box chart. The breakdown occured when the Os at 1420 are broken by a posting at 1410. The only correct answer is 1410. A2: The only correct answer is 220. (du Plessis, The Definitive Guide to Point and Figure). This is a 3box chart.



The breakdown will occur if prices fall below the last column of Os (a Double Bottom pattern). The break of the 45 degree Bearish Support Line (not shown, but assuming the test taker drew one in) does not result in a breakdown B1: No B2: Acceptable factors for credit: 1) Bonds yield has broken out to the downside. Bond Prices and Commodities trend in opposite directions. 2) The S&P shows a major break down. Commodities follow the lead of stocks. 3) Bond and Stock prices trend in opposite directions. This is true in this example as bonds have broken out to the downside (bond prices to rally) and the S&P has broken down. This reinforces the potential for weakness in commodities. Key Elements: Bonds and commodities trend in Opposite Directions (Murphy Intermarket, pg 116) Bonds and stock prices trend in opposite directions (Murphy Intermarket, pg 119) Commodities follow the lead of stocks (Murphy Intermarket, pg 117) Explanation: On the surface it appears that one should answer "Yes", overweight the GSCI because it is in a strong rising trend. But looking beyond the GSCI chart there are several inconsistencies that argue against relying on the GSCI chart alone. 1) Murphy tells us that Bonds and Commodities trend in opposite directions. That means rising commodities should be accompanied by falling bond prices. However, the 10 year Yield shows a major downside breakout. Falling yields mean rising bond prices and that is inconsistent with rising commodity prices. 2) Murphy tells us that Commodities follow the lead of Stocks. Stocks (S&P) have broken down and that suggests potential weakness in commodities. 3) Murphy tells us that Bond and stock prices trend in opposite directions. This is true in our example. That this condition is true raises further doubts about relying solely on the GSCI's uptrend. It's not clear that the GSCI is poised for a major breakdown (which was in fact what occurred), but is should be clear that the uptrend so clearly visible in the GSCI chart faces substantial threats and should not be over weighted.

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Question 7: Behavioral Finance 7A –

1) Firms with high PE ratios tend to do poorly subsequently. 2) First with high PB ratios tend to do poorly subsequently. 3) Firms that rise a great deal over 5 years tend to go down over the next five years. 4) Firms that decline a great deal over 5 years tend to go up over the next five years. 5. IPO's tend to occur at the peak of industry specific fads and then have price declines relative to the market. Key: Shiller, 2nd edition, Chapter 9, pages 179 ‐ 180.

7B –

Wealth: 1) Labor Income 2) Home Equity Diversification and Hedging: 3) Diversification ‐ offsetting risks that you are locked into. Choosing assets that rise when labor income and home equity decline. 4) Hedging ‐ making offsetting risk investments Public Acceptance and change 5) Too much invested in conventional wisdom OR not enough attention paid to these concepts by the professionals. 6) Professionals need to spend far more time discussing and stressing these concepts. Key: Shiller, 2nd edition, Chapter 11, pages 231 ‐ 232

7C –

Increase: 1) Internet boom 2) Expansion of stock trading opportunities Decrease: 3) Baby boom 4) Perceived victory over foreign rivals Key: Shiller, 2nd edition, Chapter 11, page 208

7D –

1) One's recent experiences in investing. 2) Regret and Envy 3) Satisfaction and pride, feeling of playing with the "house money". Key: Shiller, 2nd edition, Chapter 3, pages 56 ‐ 57

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