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

Thesesamplequestionsareusedtoprovidethecandidatewithexamplesofhowthequestionsmayappear on the CMT exam. The actual CMT exam does not have any true/false questions. These sample questions covermuchofthemateriallistedintheBodyofKnowledge,whiletheactualexamquestionsmaybemore difficult.In addition,thesesamplequestionscoveravarietyoftopics;however,theactualexamweighting mayvary. 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 differentlyfromtheactualexamsoastobetterserveasareviewforcandidates.Forexample,manyquestions and/oranswersmaybelongerthanintheactualexamsothatthequestionsandanswersserveasareviewof thematerial. The MTA maintains a discussion group forum for CMT candidates on its web site. Candidates are encouragedtoutilizethisresourceandtodiscussanyareasoftheBodyofKnowledgewithwhichtheyarenot familiar. Thisbookofpracticeexamsisproducedby: MarketTechniciansAssociation,Inc., 61Broadway,Suite514 NewYork,NY10006 All material is believed to be reliable at time of publication, but not guaranteed. The Market Technicians Association,Inc.,anditsofficers,assumesnoresponsibilityforerrorsoromissions.

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P a g e 3

Question1:Ethics(30points)
Pleasediscusswhat,ifany,violationhasoccurredineachofthefollowingstatements. DuringarecentinterviewwithForbes,ArteauDeteau,CMTwasaskedtocommentabouthisoutlookonthestock market,hisrecentmarketcommentaryandseveralstockpicks. 1A.Ihavespecialinsightintothemarket,Mr.Deteautoldtheinterviewer,thekindpossessedbyonlyavery fewpeople.(5points) 1B.Duringthecourseoftheinterview,Mr.Deteausaid,IgenerallydontusetheCMTdesignationonmy writtenpieces.ItwoulddistractfromtheworkIvedone.(5points) 1C.TheworstjobIeverhad,theinterviewerwastold,waswiththathothedgefund.Theplaceisamess.The MDscantkeeptheirprivatelivesundercontrolandthedrugsarejustrampant.Youcantimaginethelosses theysustaindaily.(5points) 1D.IvereadanalysisbyCeeThrepio.Icantbelievethatguygetspaidforwritingthatgarbage.(5points) 1E.Althoughthetechnicalsreallydontmeritit,ImbullishonABC.Friendsofminetellmethatthecompanyis ontheblockandadealislikelyanydaynow.Impublishingareportlatertodaythatwillpumpthisdogupand thenIlldumpwhateverIown..(5points) 1F.Youknow,Icoulddoalotforyourcirculation.WhydontIgiveyoutheMembershiplistfortheMTAand youcanprospectit?(5points)

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

Question2:IntermarketAnalysis(40Points)
PartA(30points):Analyzethepatternsonthefollowingthreecharts.Identifytheonedominantformationoneach chart.Youranswermustincludethenameoftheformation,thestartandenddateforeachformation,apricetarget andtheformulausedtocalculatethepricetarget. Pointswillonlybeawardedforcompleteanswers.PointswillnotbeawardedforElliottwaveorFibonaccianalysis. Chart#1(10points) CompositeInterestRateYieldIndex

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P a g e 5 Chart#2(10points) CompositeEquityPriceIndex

Chart#3(10points)

CompositeCommodityPriceIndex

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

PartB(10points): 2B.1(5points) Whatisthecurrentstageofthecycle? 2B.2(5points) Assumingthethreeassetclassesrotatedaccordingtotheclassicbusinesscyclemodel,whatisyour12month outlookforthesethreeassetclasses?

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P a g e 7

Question3:CandlestickAnalysis(60Points)
PartA:ChartAnalysis(36points) Yourfirmallocatesequitycapitalacrossglobalmarkets.Youhavebeenaskedtogiveatechnicalopinionwhetherany orallofthethreemarkets(US,IndiaandBrazil)shouldbeoverweightedorunderweightedintheportfolio. Baseyouranalysisontherecentsignificantcandlestickformations,pricerelativetothemovingaverages,the14week stochasticandtheindicesrelativepricestrength.Note,theseareweeklycharts,themovingaveragesare10and40 periods,andtherelativepricestrengthistotheEAFEindex. Answer: Notetograders:Morethan12pointshavebeenidentifiedineachoftheanswers.Maximumpointtotalforeach responseisstill12points. 3A.1BombaySensexIndex,Chart#4(12points)

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

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

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P a g e 9 3A.3Standard&Poors500Index,Chart#6(12points)

B:CandlestickPatternIdentification(24points) Identifyandexplainthesignificanceofthefollowingsixcandlestickpatternswithintheovals,(2points)ANDbriefly explainhoweachpatternissignificant.(2points)

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

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

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P a g e 11 3B.2EAFE,Chart#8(4points)

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

3B.3AAONCorp.,Chart#9(4points)

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P a g e 13 3B.4AbbottLabs,Chart#10(4points)

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

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

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P a g e 15 3B.6GartnerGroup,Chart#12(4points)

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

Question4:Strategies&TechniquesinTechnicalAnalysis(35points)
Advancedanalysisusingmomentumindicators,oscillators,trendlines,andsupportandresistancePleasenotethat nocreditwillbegivenforanElliottWaveanalysisonanypartofquestion3 PartA:DrawingTrendLines(5points) Whichuptrendline,UptrendLineAorUptrendLineB,isthemorevaliduptrendlineforKansasCitySouthern (KSU)?(1Point) WhyisUptrendLineAorUptrendLineBthemorevaliduptrendlineforKansasCitySouthernKSU?Fullcredit willonlybegivenforaddressingboththepriceandvolumeinthechartprovided.(4Points) Chart#13,Question4A KansasCitySouthern(KSU)dailybarchart

UptrendlineA

UptrendlineB

Dailyvolume

Source:Bloomberg

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P a g e 17 PartB:UsingRSIsignalstogenerateapairstradeidea(14points) Chart#14,#15,and#16 Youworkatahedgefundandhelpgeneratepairstradingideasinlargecapstocksbasedontechnicalanalysis.Ina pairstradeaninvestorgoeslongonestockandshortanotherstockandexpectsthelongstockpositiontooutperform the short stock position. Using the three charts provided, generate a pairs trade idea for Stock A and Stock B. The chartsprovidedare1)theweeklychartofStockArelativetoStockB,2)thedailychartofStockA,and3)thedaily chartofStockB.YourfundspreferredtechnicalindicatoristheRSIandallthreechartshavea14periodRSI. Chart#14,Question4B StockAvs.StockBweeklychart

14weekRSI

Source:Bloomberg

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

Chart#15,Question4B StockAdailyclosingprices

14dayRSI

Source:Bloomberg Chart#16,Question4B StockB

14dayRSI

Source:Bloomberg
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P a g e 19 Long: Short: Justify and support your pairs trade strategy using bullet points (one or two sentences maximum for each bullet):FourbulletpointsfortheweeklychartofStockAvs.StockB(4Points),Fourbulletpointsforthedaily chartofStockA(4Points),andFourbulletpointsforthedailychartofStockB(4Points).Besuretoaddressthe bothpriceandRSIforeachofthethreechartsinyourresponse.(Total12Points) Basedonyouranalysisofthethreecharts,stateyourpairstradestrategyforStockAandStockB.(2Points)

Pairstradestrategybulletpoints WeeklychartofStockArelativetoStockB 1) 2) 3) 4) DailychartofStockA 1) 2) 3) 4) DailychartofStockB 1) 2) 3) 4) PartC:ReversalsignalsandsupportsandresistancesusingtheRelativeStrengthIndex(RSI)(10points) 4C.1YouworkonaproprietarytradingdeskandhaveidentifiedapotentialintermediatetermbuysignalinMarket A.Usethemonthlypricechartwith14monthRSIandthedatasheetprovidedtoestablishanupsidepricetargetfor MarketAusingthepositivereversaltechnique.Stateyouranswerouttwodecimalplaces.Toreceivepartialcreditfor anincorrectanswer,showyourwork.(4Points)

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

4C.2SomeofthetradersdonotagreewithyourrecommendationtobuyMarketA.Theirprimaryconcernisthat monthlyRSIpeakedin1982anddidnotreachnewhighsalongwithMarketAin1983and1984,settingupapotential negative divergence. They also say that Market A has become overextended on the upside. Use your knowledge supportandresistancelevelsonRSItosupportyourBuycaseforMarketA.(4Points) UsingtheRSI,whatsignalwouldinvalidatethepositivereversalsignalforMarketA?(1Points) WhatisanappropriatestoplossonMarketAshouldyourBuyrecommendationonMarketAnotworkout?(1Point) Chart#17,Question4C MarketAmonthlybarchart

MarketA14monthRSI

Source:Bloomberg

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P a g e 21 Chart#18,Question4C

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

PartD:VolatilitybandsonOscillators(6points) Themanagerofyourtradingdeskislookingforotherwaystouseoscillatorstogeneratebuyandsellsignalstotrade individualcommonstocks.YourmanagershowsyouadailychartofDupontCo.(DD)withvolatilitybandsarounda14 dayRSIandwouldliketoknowifoverlayingvolatilitybandsonRSIcanbeusedtogeneratetradingsignals. Chart#19,Question4D

Source:www.stockcharts.com

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P a g e 23 DescribehowvolatilitybandsaroundanRSIareusedtogeneratebuyandsellsignalsfortheunderlying security?(4Points) IsitnecessaryforadivergencebetweentheRSIandpricetoaccompanybuyandsellsignalsusingRSIand volatilitybands?(1Point) BasedonvolatilitybandsandRSI,whendidthemostrecentsignalforDuPont(DD)occur?Basedonthissignal, areyoulongorshortDD?(1Points)

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

Question5:ElliottWave(25points)
Chart#20

Pleasenote:1)theweeklychartofBHPforthisquestionisinlogscaleand2)thepointslabeledwithapricearefor referenceonlyanddonotsignifyaparticularElliottpoint. StartingattheSeptember1998lowat$6.25andcontinuingtotheendofthedata: 5A.1IdentifytheprimarydegreewavesbyusingthepricepointsnotedonthechartofBHP.(5points) 5A.2DescribethesecondarydegreewavepatternswithintheprimarydegreewavesandlisttheElliottwaverules andguidelinesandanyFibonacciratiorelationshipsyouusedindeterminingyourprimarydegreewavecounts.(Base yourcountsonwhateverinformationisavailable.Inrealworldanalysis,youwouldhaveaccesstoshortertimeframe chartstoconfirmcounts,butthatisnotpossiblehere.)(15points)

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P a g e 25 5A.3Asananalyst,whatactiondoyourecommendnow?(5points)

Question6:PointandFigure(30points)
SeeCharts#21,#22,&23 YouhavebeencalledbackforasecondjobinterviewwithFranconiaNotchAssetManagementCorporation.Youare interviewing for the position of Market Strategist. You meet the firm's Chairman and Chief Investment Officer in a conferenceroomandaftersomediscussionshepresentsyouwiththreecharts.Basedonthesethreechartsyoumust decidewhetheryouwouldrecommendoverweightingcommoditypricesforthenextthreemonths.Sheinformsyou thatyoumustbaseyourrecommendationonevidencecontainedonlyinthosethreechartsandyourownknowledge and experience. She will be back in 15 minutes to hear your recommendation and explanation. Thethreechartsare: Chart#21 S&P500

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

Chart#22

GoldmanSachsCommodityIndex

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P a g e 27

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

Chart#23

US10YearYield

PartA(10points): 6A.1TheS&P500isinashorttermdowntrend.Atwhatpriceleveldiditbreakdown?Chart#21(5points) 6A2:TheGoldmanSachsCommodityIndexisinashorttermuptrend.Atwhatpricelevelwoulditbreakdown? Chart#22(5points) PartB(20points): 6B.1Shouldcommoditypricesbeoverweighted?Answer"Yes"or"No"only. Chart#21,#22,&#23(11points) 6B.2Listthethreemostimportantfactorsinreachingyourdecision.(3pointseachTotalof9points)

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P a g e 29

Question7:BehavioralFinance(20points)
7A: As discussed by Shiller, what statistical (systematic) evidence exists of asset mispricing (it is not necessary to mentiontheauthornamesbehindtheacademicstudies)?(5points) 7B: As discussed by Shiller, what two items make up the bulk of most people's wealth? How is diversification and hedgingdefinedwithinthiscontext?Whyhasn'tthepublicembracedtheseconceptsandwhatmusthappeninorder forthattochange?(6points) 7C: Of the 12 precipitating factors to the stock market bubble of the 1990's discussed in the book Irrational Exuberance,what2didauthorRobertShillerthinkwouldlikelyincreaseinstrengthintothe21stcenturyandwhich2 wouldlikelydecrease?(4points) 7D:Intermsofinvestorexpectationsandemotions,whatisthedominantfactorinhowonefeelsaboutthefutureof assetprices?Forsomeonewhomissedoutonabigmarketmove,whatemotionswoulddrivetheirdecisionmaking? Whatemotionsdrivethefuturedecisionsofsomeonewhoparticipatedinabigmarketmove?(5points)

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

AnswerKey
Question1:Ethics
1A Code2:MembersandAffiliatesshallnotpublishormakestatementswhichtheyknowareorhavereasontobelieve areinaccurateormisleading.MembersandAffiliatesshallavoidleadingotherstobelievethattheirtechnicallyderived 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 statementsarereasonableandconsistentinlightoftheavailableevidenceandoftheaccumulatedknowledgein the fieldoffinancialtechnicalanalysis. 1B Code 9: Members who have earned the CMT designation shall use CMT after their name whenever and wherever appropriate. 1C Code6:MembersandAffiliatesshallkeepinconfidenceknowledgeconcerningthelawfulprivateaffairsofbothpast andpresentclients,employers,andemployersclients.Code1:Actwithdignityandinanethicalmanner. 1D Code 4: Members and Affiliates shall not publish or make statements which indefensibly disparage and discredit the analyticalworkofothers. 1E Code2:MembersandAffiliatesshallnotpublishormakestatementswhichtheyknoworhavereasontobelieveare inaccurate or misleading. Members and Affiliates shall avoid leading others to believe that their technicallyderived 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 statementsarereasonableandconsistentinlightoftheavailableevidenceandoftheaccumulatedknowledgein the fieldoffinancialtechnicalanalysis. 1F Code1:MemberandAffiliatesshallnotundulyexploittheirrelationshipwiththeAssociationforcommercialpurposes, noruse,orpermitotherstouse,AssociationmailinglistsforotherthanAssociationpurposes.

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P a g e 31

Question2:IntermarketAnalysis PartA: Chart#1(10points) CompositeInterestRateYieldIndex Formation:Rectangle Target:50 StartDate:September2000 EndDate:February2001 Formula:(FormationHigh40Formationlow30)10+(FormationHigh40)=50 Chart#2(10points) CompositeEquityPriceIndex Formation:Head&Shoulders Target:700 StartDate:January2000 EndDate:March2001 Formula:(neckline1000)(Head1300Neckline1000)300=700 Chart#3(10points) CompositeCommodityPriceIndex Formation:DescendingTriangle Target:50 StartDate:June2001 EndDate:NotComplete(October2001) Formula:(TriangleBottom60)(FormationHigh70Formationlow60)10=50 PartB: 2B.1 Stage5BondsFalling/StocksFalling/CommoditiesRising 2B.2 Assumingthethreeassetclassesrotatedaccordingtotheclassicbusinesscyclemodel,whatisyour12month outlookforthesethreeassetclasses.Commoditieswillfall,bondswillrally,stockswillrallycommoditieswillrally.

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

Question3:CandlestickAnalysis
3A.1BombaySensexIndex,Chart#4(12points) TheindexisinanupwardslopingchanneldefinedbyalowertrendlineacrosstheOctober2009,Feb2010andMay 2010lowsandanuppertrendlinedrawnacrosstheSept2009,Jan2010andApril2010highs(1pt).TheOctober andMaylowshavebullishhammerformations(2pts.)TheSept.2009highhasadarkcloudcover(1pt)pattern whiletheJan2010peakhasbothashootingstarandahangingmancandle (2pts.)Themostrecent candleisa potentialshootingstar,awaitingconfirmation(1pt.)Majorresistanceisfoundnearthe19,000levelwherethe falling window occurred in late 2007 (1 pt.) The 10 week moving average remains above the 40 week moving averageandisattemptingtoturnup(1pt.)Thestochasticoscillatorisonabuysignalgeneratedfromabullish40 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 upperreturnlineisdrawnacrossthehighsofJan2008andJuneJuly2009.Relativepriceisatanewhigh(1pt.) Baseduponthepositiveprice,stochasticandrelativeprice,theSensexshouldbeoverweightedintheportfolio(1 pt.) 3A.2BovespaIndex,Chart#5(12points) Theindexhasformedaroundingtop(1pt)(NOTdumplingtopnofallingwindownopointsfordumplingtop) confirmedbythetrendlinebreak(1pt)inMay.InApril,thereisaspinningtopcandle(1pt)insideatowertop(1 pt.)TheMaylowhasahammerformation(1pt.),whilethemostrecentcandleisashootingstarfromjustbelow the40weekmovingaverage(resistance)(1pt.)The10weekmovingaveragehascutbelowthe40weekmoving average forming a death cross. (1 pt.) The recent top has been formed just below the alltime high in MayJune 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 remainsinanuptrend(1pt),butiscurrentlyinwhatappearstobeanascendingwedgeformation(1pt)whichhas bearishconnotations.Thepatternisnotyetcompleteasthelowertrendlinehasnotbeenviolated.Basedupon thenegativepriceaction,divergencesanddeepreadinginthestochasticandpotentiallybearishrelativestrength pattern,theBovespashouldbeunderweightedintheportfolio(1pt.) 3A.3Standard&Poors500Index,Chart#6(12points) The index has broken an uptrend in May (1 pt.) This is after price stopped at major resistance formed by a convergingoverheadresistancetrendline,thefallingwindowinOctober2008,andtheFibonacci0.618retracement of the bear market (3 pts.) Additionally, price has formed an apparent 3 Buddha top formation (as this is a candlestickquestion,candidatesmustgive3Buddhatopresponse,NOTheadandshoulders),pendingthebreakof resistance(necklineinwesternTA.)(1pt.)NotetheshootingstarinMaybelowthe10weekma,suggestingthisma is now formidable resistance (1 pt.) While the most recent candle looks like a bearish engulfing pattern, the advancefromtherecentlowisverysmall(1pt.)The10weekmovingaveragealsoprovidedresistanceinthelast week (1 pt.) While it remains above the 40 week moving average, the dropoff values over the next few weeks stronglysuggestitcutbelowthe40wkmaformingadeathcross(1pt.)Thestochasticoscillatorisonabuysignal yetitmadealowerlowwhilepricehadnotyetbrokentoalowerlow,creatingabearishdivergence(1pt.)Relative pricestrengthhasformedasmalldoubletop(1pt)justbelowtheDecember2009peak.Additionally,adowntrend cannowbedrawnfromtheDecember2009peakacrossthetwopeaksofthedoubletop(1pt.)Baseduponthe negative price action, negative stochastic behavior and apparent failure of relative price strength at the previous peak,theS&P500shouldbeunderweightedintheportfolio(1pt.)
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P a g e 33 3B.1Bombay,Chart#7(4points) Abandoned Baby Bottom (2 pts); This is a special morning star formation where the middle candle is the equivalentofanislandbottom.Aspricegappedlowerbetweenthefirstandsecondcandle,anapparentstrong negativesignalisgiven.Aspricegappedbackupinthethirdcandlethebullswrestcontrolfromthebears.(2 pts) 3B.2EAFE,Chart#8(4points) ThreeBlackCrows(2pts);Thethreeblackcrowspresagelowerpricesiftheyappearathighpricesoraftera matureadvance.(2pts) 3B.3AAONCorp.,Chart#9(4points) UpgapSidebySideWhiteLines(2pts);Duringarallyanupwardgappingwhitecandlefollowedbyanother whitecandleofsimilarsizeisabullishcontinuationpattern.(2pts) 3B.4AbbottLabs,Chart#10(4points) FallingThreeMethods(2pts);Abullishcontinuationpattern,thisformationisarestfromthebattle,ie,asmall consolidation.(2pts) 3B.5Aflac,Chart#11(4points) DumplingTop(2pts);Thisisatopreversalusuallywithsmallrealbodiesasthemarketcreatesaconvex pattern.Confirmationcomeswhenpriceformsafallingwindow.(2pts) 3B.6GartnerGroup,Chart#12(4points) TowerTop(2pts);Thispatternunfoldsathighpricelevels.Afterarally,alulloccursfollowedbyalargeblack candle.Theformationappearstohavetowersoneachend,hencethename.(2pts)

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

Question4:Strategies&TechniquesinTechnicalAnalysis
UptrendLineA AccordingtoConstanceBrown,dominanttrendlinesarenotalwaysdrawnfromextreme pricehighsorlows. Trendlineshouldstartfromtheprice extremethatisbehindthekeyreversalorspikeratherfromtheactual priceloworhigh.Volumecanbeusedasameasureofwhetherasecurityhasshownakeyreversalorspikehigh orlow.Trendlinesshouldnotbedrawnattheseextremes.UptrendlineAonKSUconnectsthelowervolume pricelowsbeforethehighervolumereversallowsinSep/Oct2009,Nov/Dec2009,andJan/Feb2010.Thistrend lineshowsthecongestionareasonthechartbetterthanUptrendB,whichmayjustshowthetendencyofthe crowdtopanic. KansasCitySouthern(KSU)dailybarchart WhyisUptrendLineAorUptrendLineBthemorevaliduptrendlineforKansasCitySouthernKSU?Fullcredit willonlybegivenforaddressingboththepriceandvolumeinthechartprovided.(4Points) Whichuptrendline,UptrendLineAorUptrendLineB,isthemorevaliduptrendlineforKansasCitySouthern (KSU)?(1Point)

UptrendlineA

UptrendlineB

Dailyvolume

Source:Bloomberg

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P a g e 35 PartB:UsingRSIsignalstogenerateapairstradeidea Referencematerial:TechnicalAnalysisoftheTradingProfessionbyConstanceBrown:pp318,121141. Basedonyouranalysisofthethreecharts,stateyourpairstradestrategyforStockAandStockB.(2Points) Long:StockB Short:StockA Justifyandsupportyourpairstradestrategyusingbulletpoints(oneortwosentencesmaximumforeachbullet):Four bulletpointsfortheweeklychartofStockAvs.StockB(4Points),FourbulletpointsforthedailychartofStockA(4 Points),andFourbulletpointsforthedailychartofStockB(4Points).BesuretoaddressthebothpriceandRSIfor eachofthethreechartsinyourresponse.(12Points) Pairstradestrategybulletpoints WeeklychartofStockArelativetoStockB 1. StockAremainsinadowntrendrelativetoStockBthatappearssetuptocontinue.Thisdowntrendhasbeenin placesince2002andStockAshowsnomajorsignsofabottomvs.StockB. 2. AnegativereversalsignalfortheRSIoffthelate2008andearly2009peakssupportsthecaseforadditional weaknessforStockArelativetoStockB 3. RSIisweakandbreakingsupportsfromearly2010andearly2009. 4. RSIisatriskforbreakinganuptrendsupportlinefrommid2006. 5. StockAisbreakingbelowashorttermuptrendvs.StockB,pointingtoadditionalweaknessforStockArelative toStockB.Thepatternappearstobeabearishheadandshoulderscontinuationpattern. DailychartofStockA 1. StockAhasadoubletopinplaceoffthe$31areahighsandisbreakingtonewneartermlows. 2. RSIforStockAshowsastrongnegativereversalfromtheMayandJune2010highs.Thissupportsthecasefor moreweaknessinStockA. 3. RSIforStockAstalledatresistancenear50,whichisthepriorlowfortheRSIfromMarch/April2010low. Stallingbelow50ontheRSIindicatesaweakeningpatternformomentum. 4. RSIforStockAappearstobeenteringabearishsupportandresistancezone. 5. RSIforStockAhasashorttermuptrendlinebreak.TheuptrendforRSIisdrawnoffthelateMay/earlyJune 2010lows. DailychartofStockB 1. WhileStockBhasaweakpricepattern,thepricechartissomewhatstrongerthanStockA.StockBdoesnot haveadoubletopandisnotbreakingtofreshneartermlows. 2. WhileStockBalsoshowsanegativereversaloffMayandJune2010highs,theRSIforstockBshowsashort termbottom.ThisbottomintheRSIshowsabreakoutandaretestofthebreakout,whichhasthepotentialto bebullishshortterm. 3. RSIforStockBisholdingshorttermuptrendsupport.StockAbrokeitsshorttermuptrendsupport. 4. Onashorttermbasis,RSIforStockBisrising,whileRSIforStockAisfalling. 5. WhileStockBalsoshowssignsofweaknessonitsdailypriceandRSIchart,thepatternisgenerallymore constructiveforStockBthanStockA.ThissuggeststhatStockBshouldoutperformStockA

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PartC:ReversalsignalsandsupportsandresistancesusingtheRelativeStrengthIndex(RSI) Referencematerial:TechnicalAnalysisoftheTradingProfessionbyConstanceBrown:pp318,121141. YouworkonaproprietarytradingdeskandhaveidentifiedapotentialintermediatetermbuysignalinMarketA.Use themonthlypricechartwith14monthRSIandthedatasheetprovidedtoestablishanupsidepricetargetforMarket A using the positive reversal technique. State your answer out two decimal places. To receive partial credit for an incorrectanswer,showyourwork.(4Points)
135.51+(128.22117.36)=146.37 Close on second RSI low: Close on first RSI low: Close on middle RSI peak: DATE May-1984 Apr-1984 Mar-1984 Feb-1984 Jan-1984 Dec-1983 Nov-1983 Oct-1983 Sep-1983 Aug-1983 Jul-1983 Jun-1983 May-1983 Apr-1983 Mar-1983 Feb-1983 Jan-1983 Dec-1982 Nov-1982 Oct-1982 Sep-1982 Aug-1982 Jul-1982 Jun-1982 May-1982 Apr-1982 Mar-1982 Feb-1982 Jan-1982 Dec-1981 Nov-1981 Oct-1981 Sep-1981 Aug-1981 Jul-1981
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128.22 117.36 135.51 HIGH 135.06 132.64 129.97 134.65 136.15 134.05 131.36 128.44 130.77 131.94 128.44 126.21 123.79 122.43 122.65 122.28 121.12 121.45 126.02 124.78 122.76 121.41 121.06 120.47 112.79 115.36 114.73 111.93 108.78 106.46 105.35 108.65 110.76 114.88 111.72

-10.86 146.37 LOW 132.10 128.36 126.18 128.25 133.19 130.78 128.90 126.21 128.35 128.09 124.98 124.25 120.90 121.14 118.97 118.02 115.43 117.05 121.00 121.23 118.78 116.95 116.12 113.25 109.70 111.60 110.28 109.14 104.62 103.37 103.18 103.86 103.84 110.01 108.52

difference between lows price target from +reversal CLOSE 133.69 132.64 128.22 128.25 135.51 131.79 130.64 128.40 128.35 130.84 128.44 124.94 123.79 122.39 122.21 120.35 121.12 117.36 121.00 124.78 122.20 120.29 119.05 119.04 112.79 111.60 114.73 111.93 108.03 104.69 103.18 106.13 107.73 110.28 111.72 RSI 66.17 65.08 60.05 60.11 75.53 72.13 70.97 68.61 68.56 74.37 72.26 68.80 67.56 66.04 65.85 63.89 65.33 61.40 68.37 76.77 74.80 73.25 72.22 72.21 66.61 65.38 71.86 69.33 65.30 61.25 59.26 65.37 68.95 75.03 78.67 First "higher" RSI Low RSI high between the two peaks Second "lower" RSI Low

OPEN 132.95 128.36 128.68 134.65 133.19 130.78 129.23 128.15 130.74 129.68 124.98 124.68 122.04 122.27 120.79 120.99 116.97 121.03 124.36 122.14 120.03 117.80 119.33 113.71 111.51 114.16 111.96 109.32 104.62 103.65 104.99 107.57 110.76 114.03 108.52

P a g e 37 SomeofthetradersdonotagreewithyourrecommendationtobuyMarketA.Theirprimaryconcernisthatmonthly RSIpeakedin1982anddidnotreachnewhighsalongwithMarketAin1983and1984,settingupapotentialnegative divergence.TheyalsosaythatMarketAhasbecomeoverextendedontheupside.Useyourknowledgesupportand resistancelevelsonRSItosupportyourBuycaseforMarketA.(4Points) MarketAisinastronguptrendandcouldverywellbeoverextended,butusingtheRSIasaguideshowsthata bullishsupportlevelnear60isholding.SupportontheRSIisatthelowsfrom1983,1982,and1981aswellasat thehighfrom1976.ThissuggeststhattheuptrendforMarketAisintact.Whiletherearenegativedivergences onthechart,theyarenotyetconfirmedbypriceweaknessorabreakdownintheRSI.RSIbreakingsupportat the60levelwouldprovidesomeevidencethatthebearishdivergencesarestartingtoweighonMarketA.Butat thepointwhenthechart isdrawn,thebenefitofthedoubtisontheupsidesinceRSIand pricesupportsare holding.ThemessagefromRSIisthattheuptrendisintactforMarketAwithadditionalupsideexpected. UsingtheRSI,whatsignalwouldinvalidatethepositivereversalsignalforMarketA?(1Points) The following is the only answer to accept and is straight from the Connie Brown text: A price objective is negatedwhentheRSIviolatesthetrendlinethatconnectsthetwomomentumlevelsthatareusedtocalculate the differential for the price objective. In this case, it is the trend line that connects the RSI lows from late (December)1982andearly(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 months open this would suggest a monthly bearish engulfing pattern. Also acceptable is a stop on a close below last months low this would place an outside month down. Both the bearish engulfing pattern and outsidemonthdownwouldbewarningsignals. PartD:VolatilitybandsonOscillators Referencematerial:TechnicalAnalysisoftheTradingProfessionbyConstanceBrown:pp239250. DescribehowvolatilitybandsaroundanRSIareusedtogeneratebuyandsellsignalsfortheunderlyingsecurity?(4 Points) Page 241 of Technical Analysis of the Trading Profession by Constance Brown. Look at the upper and lower extremerangesfortheRSI.WhentheRSIisnearanextremehighorlowandistouchingthevolatilityband,the indicator will follow the strong move with a pullback from the band. The market signal occurs when the RSI attemptstoresumetheformertrendandfailstochallengeorreachtheouterbandasecondtime.Atextreme highs,afailureoftheRSItotouchtheupperbandgeneratesasellsignal.Atextremelows,afailureoftheRSIto reachthelowerbandtriggersabuysignal. IsitnecessaryforadivergencebetweentheRSIandpricetoaccompanybuyandsellsignalsusingRSIandvolatility bands?(1Point) Page241.Itisnotnecessarytohaveadivergence.
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C M T L e v e l 3 S a m p l e Q u e s t i o n s

BasedonvolatilitybandsandRSI,whendidthemostrecentsignalforDuPont(DD)occur?Basedonthissignal,are youlongorshortDD?(1Points) May2006.Bearish.

Question5:ElliottWave
5A.1 Wavesofprimarydegreeoftrend:5points(1each) Wave16.2513.81 Wave213.817.57 Wave37.5787.23 Wave487.2324.63 Wave524.63unclearatthistime,Wave5islikelynotcompleteyet. 5A.2 Secondarywavepatterns15points(3each) Wave1iscomposedofaclearpatternof5waveswithwave3extended. Wave2isazigzagwithwaveBacomplexdoublezigzagthatretraces.618percentofwaveA.AlsowaveCis almost equal in length to wave A. The whole of Wave 2 does not break the low of wave 1 (RULE WAVE 2 CANNOTBREAKBELOWTHESTARTOFWAVE1). Wave3isa5wavepatternwithwave31from7.5713.02,wave33from8.9030.84,andwave35from23.39 to87.23.Thelengthofwave35isjustover2.618timesthedistancefromthebeginningofwave31totheend ofwave33,soWave3isextendedandwithinWave3,wave5isextended.WithinWave3,alinedrawnfrom theendofwave33thatisparalleltoalineconnectingthelowsofwave32andwave34providesanobjective fortheendofWave3.(RULEWAVE3CANNEVERBETHESHORTEST) Wave4(alternatingwiththezigzagofWave2,guideline)isanexpandedflatwiththehighofwaveBexceeding thebeginningofwave4.BothwavesAandBofWave4aresimplezigzagswithwaveBretracingalmost1.382 timeswaveA.WaveCisa5wavepatternendingintheareaofthewave4oflesserdegree.(RULEWAVE4 DOESNOTBREAKTHETOPOFWAVE1) ThewavecountforWave5isunclear.ItispossiblethatwhatwearelabelingasWave5couldstillbepartof Wave4.Itisnotadiagonalfifthwavebecauseitdoesnotappearthatwave4isdippingintotheareaofwave1. Becausethelastpushuptothe83.15areaappearstohavebeenafivecountwave,thatmaysignaltheendof theentiremoveinatruncatedfifthwave. 5A.3 Recommendation:5points Asananalyst,werecommendbeingonthesidelinesatthistime.Themomentumisclearlyslowingasprice meetsstrongresistanceintheareaofthehighs.RiskismuchhighernowthanatthebeginningofWave3up. Themostlikelymovefromhereistothedownside.

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P a g e 39

Question6:Point&Figure
PartA: Inthiscase: S&Pshowsahugetop. GoldmanSachsCommodityIndexisinastronguptrend. US10YrYieldshowsahugetop(strongbondmarketexpectedasyieldsdrop). 6A1 Thisisa1boxchart.ThebreakdownoccuredwhentheOsat1420arebrokenbyapostingat1410.Theonly correctansweris1410. 6A2 Theonlycorrectansweris220.(duPlessis,TheDefinitiveGuidetoPointandFigure).Thisisa3boxchart.The breakdownwilloccurifpricesfallbelowthelastcolumnofOs(aDoubleBottompattern).Thebreakofthe45 degreeBearishSupportLine(notshown,butassumingthetesttakerdrewonein)doesnotresultina breakdown PartB 6B1No 6B2 Acceptablefactorsforcredit: 1)Bondsyieldhasbrokenouttothedownside.BondPricesandCommoditiestrendinoppositedirections. 2)TheS&Pshowsamajorbreakdown.Commoditiesfollowtheleadofstocks. 3)BondandStockpricestrendinoppositedirections.Thisistrueinthisexampleasbondshavebrokenoutto thedownside(bondpricestorally)andtheS&Phasbrokendown.Thisreinforcesthepotentialforweaknessin commodities. KeyElements: BondsandcommoditiestrendinOppositeDirections(MurphyIntermarket,pg116) Bondsandstockpricestrendinoppositedirections(MurphyIntermarket,pg119) Commoditiesfollowtheleadofstocks(MurphyIntermarket,pg117) Explanation: Onthesurfaceitappearsthatoneshouldanswer"Yes",overweighttheGSCIbecauseitisinastrongrising trend.ButlookingbeyondtheGSCIchartthereareseveralinconsistenciesthatargueagainstrelyingonthe GSCIchartalone. 1)MurphytellsusthatBondsandCommoditiestrendinoppositedirections.Thatmeansrisingcommodities shouldbeaccompaniedbyfallingbondprices.However,the10year Explanation: A1:Thisisa1boxchart.ThebreakdownoccuredwhentheOsat1420arebrokenbyapostingat1410.The onlycorrectansweris1410. A2:Theonlycorrectansweris220.(duPlessis,TheDefinitiveGuidetoPointandFigure).Thisisa3boxchart.
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C M T L e v e l 3 S a m p l e Q u e s t i o n s

ThebreakdownwilloccurifpricesfallbelowthelastcolumnofOs(aDoubleBottompattern).Thebreakofthe 45degreeBearishSupportLine(notshown,butassumingthetesttakerdrewonein)doesnotresultina breakdown B1:No B2:Acceptablefactorsforcredit: 1)Bondsyieldhasbrokenouttothedownside.BondPricesandCommoditiestrendinoppositedirections. 2)TheS&Pshowsamajorbreakdown.Commoditiesfollowtheleadofstocks. 3)BondandStockpricestrendinoppositedirections.Thisistrueinthisexampleasbondshavebrokenoutto thedownside(bondpricestorally)andtheS&Phasbrokendown.Thisreinforcesthepotentialforweaknessin commodities. KeyElements: BondsandcommoditiestrendinOppositeDirections(MurphyIntermarket,pg116) Bondsandstockpricestrendinoppositedirections(MurphyIntermarket,pg119) Commoditiesfollowtheleadofstocks(MurphyIntermarket,pg117) Explanation: Onthesurfaceitappearsthatoneshouldanswer"Yes",overweighttheGSCIbecauseitisinastrongrising trend.ButlookingbeyondtheGSCIchartthereareseveralinconsistenciesthatargueagainstrelyingonthe GSCIchartalone. 1)MurphytellsusthatBondsandCommoditiestrendinoppositedirections.Thatmeansrisingcommodities shouldbeaccompaniedbyfallingbondprices.However,the10yearYieldshowsamajordownsidebreakout. Fallingyieldsmeanrisingbondpricesandthatisinconsistentwithrisingcommodityprices. 2)MurphytellsusthatCommoditiesfollowtheleadofStocks.Stocks(S&P)havebrokendownandthat suggestspotentialweaknessincommodities. 3)MurphytellsusthatBondandstockpricestrendinoppositedirections.Thisistrueinourexample.Thatthis conditionistrueraisesfurtherdoubtsaboutrelyingsolelyontheGSCI'suptrend. It'snotclearthattheGSCIispoisedforamajorbreakdown(whichwasinfactwhatoccurred),butisshouldbe clearthattheuptrendsoclearlyvisibleintheGSCIchartfacessubstantialthreatsandshouldnotbeover weighted.

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P a g e 41

Question7:BehavioralFinance
7A 1)FirmswithhighPEratiostendtodopoorlysubsequently. 2)FirstwithhighPBratiostendtodopoorlysubsequently. 3)Firmsthatriseagreatdealover5yearstendtogodownoverthenextfiveyears. 4)Firmsthatdeclineagreatdealover5yearstendtogoupoverthenextfiveyears. 5.IPO'stendtooccuratthepeakofindustryspecificfadsandthenhavepricedeclinesrelativetothemarket. Key:Shiller,2ndedition,Chapter9,pages179180. 7B Wealth: 1)LaborIncome 2)HomeEquity DiversificationandHedging: 3)Diversificationoffsettingrisksthatyouarelockedinto.Choosingassetsthatrisewhenlaborincomeand homeequitydecline. 4)Hedgingmakingoffsettingriskinvestments PublicAcceptanceandchange 5)ToomuchinvestedinconventionalwisdomORnotenoughattentionpaidtotheseconceptsbythe professionals. 6)Professionalsneedtospendfarmoretimediscussingandstressingtheseconcepts. Key:Shiller,2ndedition,Chapter11,pages231232 7C Increase: 1)Internetboom 2)Expansionofstocktradingopportunities Decrease: 3)Babyboom 4)Perceivedvictoryoverforeignrivals Key:Shiller,2ndedition,Chapter11,page208 7D 1)One'srecentexperiencesininvesting. 2)RegretandEnvy 3)Satisfactionandpride,feelingofplayingwiththe"housemoney". Key:Shiller,2ndedition,Chapter3,pages5657

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