Cmt3 Questions

Sample Questions for CMT Level III
CMT Level 3 Sample Questions
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.
Copyright 2011 Market Technicians Association, Inc. All rights are reserved.
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Note: there are several instances where the answer key indicates more points that the question allows. This is done so that if one of the answers appears that credit can be given for the response. We are not giving more points just giving you some options for grading. The current CMT 3 exam has changed a bit. Currently, Ethics is a pass/fail and does not contribute points. We have separated Point and Figure and Intermarket Analysis into two separate questions each worth 30 points. Market Breadth and Sentiment are also combined into one question worth 40 points. Elliott Wave is now 25 points. The rest remains the same.
SPRING 2011 CMT 3 EXAM Table of Contents 1 = ETHICS (30 Points) (todays exams are pass/fail no points awarded) 2 = POINT & FIGURE/INTERMARKET ANALYSIS (50 Points) 3 = MARKET BREADTH (35 Points) 4 = ELLIOTT WAVE (15 Points) 5 = BAR CHARTS WITH MACD (30 Points) 6 = DOW THEORY CONFIRMATION (15 Points) 7 = CANDLESTICK ANALYSIS (40 Points) 8 = SENTIMENT (15 Points) 9 = BEHAVIORAL FINANCE (10 Points)
Note to CMT 3 Candidates: 1. You cannot cut and paste from one page to another page. 2. Please answer questions completely but briefly. 3. Bullet points are acceptable for most answers unless instructed otherwise. 4. The point values of the questions tell you how much time you should spend on that question. 5. There are charts embedded in this test module. To access the charts click onto the chart box on the question page. 6. The chart package you will receive is destroyed after you take the exam. The graders do not see any notes you might have written on the chart booklet. They will only see what is typed on the computer. 7. You can navigate through this exam, both forward and backward. Save your answers frequently. 8. You are prohibited from discussing this exam. Do not disclose any information regarding the content of this examination on our blogs, forums, discussion groups, or any other means of communication.
QUESTION 1: Ethics (30 Points)

A. (5 Points) A group of research analysts at Lincoln Investment Advisors is preparing to write a report recommending the purchase of AlphaCare common stock. Based on his balance sheet studies and the net present value of future expected cash flows, one of the more senior analysts suggests a price target of $50 per share. Given the fact that the stock is now trading between $25 and $27, he suggests that his firm put a strong buy recommendation on AlphaCare. Another analyst at the firm asks, before we write our recommendation, shouldnt we at least review a stock chart? The senior analyst replies, Charts are great if you want to predict the past, but the past already happened, so there is no need for this kind of analysis. Charting offers no help in forecasting future price action. Michael, a CMT charter holder, writes his analysis without reviewing the charts. What, if any, rules were broken? Answer: It is a violation for Michael to write a report without reviewing and indeed analyzing the charts. It is a violation of Code 1, Highest standards of professional competence, Code 2 publishing or making statements which they know or have reason to believe are inaccurate or misleading.
B. (5 Points) John and Joe, CMT charter holders, are technical analysts at Lincoln Investment Advisors. They are presenting their analysis of the energy sector at a conference open to the firms qualified investors with hopes of convincing them to invest in a private investment. John and Joe thought it might be a great idea to give the attendees a creative presentation. Their power point presentation included slides of the growth trajectory of crude oil, but so far it amounted to nothing more than what the competition would think of using. Joe said to John; We have to think of something to catch the investors attention. What do you think we should do John? While speaking with each other, Joe informed John that Ben, from a competing firm, was doing a similar presentation on the energy sector. Ben used to work for Lincoln Investment Advisors with Joe and John, but left the firm years ago. Joe and John actually agreed that they liked Ben and that he was a good technical analyst. They set about looking for something that they could use against Ben so that they might look like the better choice by comparison. After much searching, John and Joe discovered an incident from Bens college years. Ben was arrested for drunk and disorderly behavior and driving while impaired after enjoying a party a little too much. He served no time and the charges were subsequently dropped. John came up with an idea; Lets privately spread the word to our group that he has an arrest record and some really wild behavior in his past. The twosome did exactly that, spreading the word about Bens background in an attempt to tarnish his reputation. What, if any rules, were broken? Answer:
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Code 1: Although no disparaging remarks were made about Bens analysis. Neither John nor Joe acted ethically or with dignity. John and Joe did not lie about Bens past, but they did not tell the entire truth either. Violation of Code 6 keep in confidence knowledge concerning the lawful private affairs of both past and present clients, employers, and employers clients. C. (5 Points) John and Joe decided that they didnt have time to write an entire report for the sales presentation so they borrowed some analysis done by Sarah, a well-known energy analyst at another firm. Sarah is an acquaintance of Joes and he is sure she would not mind if they use her work. What, if any rules, were broken? Answer: Code 8: Members and Affiliates shall not copy or deliberately use substantially the same language or analysis contained in reports, studies or writings prepared by any author unless permission to do so is received, in advance, from the author. In the event the original author is deceased, or is otherwise unavailable to grant such permission, Members and Affiliates must ensure that the original author receives prominent and adequate credit for the original work. Violation: plagiarism because no credit given for Sarahs original work. D. (5 Points) Joe and John entertained the invitees with a magic show featuring, Aldo the Great. Aldo opened his act reading the minds of people in the audience. The audience of prospects was told to concentrate on something that recently happened. In the audience there were several ringers (people hired and placed there by Joe and John) in the crowd. Aldo the Great placed his fingers at his temples and as though in a trance spoke. He said, Someone by the name of Charlie has just today inherited a great deal of money from an unknown Uncle Frank. Sure enough the ringer Charlie said, That is me. Aldo again brought his finger tips to his temples and declared, Brian has recently bought a new Lamborghini and it is red. Brian jumps up and says that is true. Naturally the audience is now engaged and is beginning to ask Aldo all sorts of questions and, eventually it turns to money. Aldo informs the group that energy is the next great sector to invest in. The audience asks for more information, but Aldo says the exercise has been too great a drain on his mind and that the show is now over. However, before stepping off the stage, he tells them that John and Joe are also gifted with the ability to read into the future, and are available for private sessions. John and Joe stated that their methods of charting the markets were of such a complicated and highly involved nature that only a true technical analysis wizard would be able to comprehend their methods. What, if any rules, were broken? Answer: Aldo the Great was a magician and cannot be held to the code of ethics. John and Joe were guilty of not only poor judgment but also if giving the impression that they have a vision or foresight or foreknowledge of the markets behavior. Violation of Code 1 Members and Affiliates shall maintain at all times the highest standards of professional competence, integrity and judgment. Said standards should be maintained, and members and affiliates should
act with dignity and in an ethical manner when dealing with the public, clients, prospects, employees, fellow Members and Affiliates and business associates. Code 2, 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. E. (5 Points) John and Joe met with Dr. Jones to discuss his investment objectives and concerns. Dr. Jones indicated to John and Joe that he was considering an investment with Ben, a broker/analyst from a competing firm. Although Ben was a competent and experienced technical analyst, John and Joe urged Dr. Jones to reconsider his decision, noting that Bens analysis was typically unreliable. In fact, they suggested that any investment Ben might recommend for purchase would be a much better short sale candidate. What, if any rules, were broken? Answer: Code 4: Members and Affiliates shall not publish or make statements which indefensibly disparage and discredit the analytical work of others. F. (5 Points) Ella is a CMT charter holder and is currently in her tenth year as a portfolio manager and technical analyst for Lincoln Securities. She enjoys a pristine reputation for her attention to client constraints; such as risk, time horizon, fiduciary responsibilities, and her total honesty regarding her clients needs, but unfortunately, because of these constraints, her portfolios annual returns have lagged behind her peers. Management has told Ella that unless she improves her performance, she will be terminated. Ella has maintained a conservative investment style, matching her clients time horizon and risk tolerance with a carefully selected group of securities. But now, faced with the possibility of losing her job, she decides to take on a much more aggressive investment strategy. She abandons her old methods of principle preservation and begins investing in aggressive growth issues. Now, rather than doing her own research, she relies more on rumors and news events to determine her next investment. Eventually, she strikes a large profit on a trade which quickly wins the praise of her management team. While being interviewed by the financial press she is asked how she brought about the large increase in her investment performance. Ella informs the press that there is something special about her abilities, her techniques are proprietary, and suggest that no one can possibly reproduce these returns. What, if any rules, were broken? Answer: Code 1, Ella is not acting demonstrating the high standards of professional competence and judgment. She also is not in compliance with applicable laws and regulations and is in violation of her clients wishes. Code 2, Members and Affiliates shale not publish or make statements which they know or have reason t to believe are inaccurate or misleading. By stating that her techniques are proprietary and special indicating that she had foresight into the future is a violation.
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QUESTION 2: Parts A and B: Point & Figure/Intermarket Analysis (50 Points) Charts 1, 2, 3, 4, & 5
Charts provided: 1. 2. 3. 4. 5. S&P 500 Index (Chart 1) Emerging Market Index (Chart 2) 2 year US Treasury Yields (Chart 3) EAFE Index (Chart 4) Crude Oil (Chart 5)
Editors Note: the numbers on the attached charts indicate the beginning of a calendar month. 1 = January, 2 = February, etc. The letters A, B, and C represent October, November, and December. These numbers and the years listed on the horizontal scale are supplied only in the interest of clarity. Question 2. Part A (30 Points) (Charts 1, 2, 3, 4 & 5) Your answers should be brief. In most cases, the correct answer is a single number or a brief sentence.
A.1. (4 Points) (Chart 5) Between April and August 2021, Crude Oil completed an important congestion pattern. Use Method 1 for Establishing a Horizontal Count from du Plessis book, The Definitive Guide to Point and Figure. Within the congestion pattern, what is the most appropriate Anchor Point, the level that you will count from to derive the price target?
Answer: A.1. 26 or 27 are both acceptable. Pg. 208 of the du Plessis book states (Method 1) that one selects the level with the least empty boxes. 26 and 27.0 have the fewest empty boxes. On pg. 209, du Plessis states that Method 1 is the "best method" for calculating price targets. (4 Points) A.2. (4 Points) (Chart 1) The S&P 500 is trying to stabilize. Considering only the last six columns on the graph, at what price level would you change the short-term trend to up?
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Answer: 1425.00 (4 Points) A.3. (4 Points) (Chart 2) What is the short-term trend of the Emerging Markets based on the last nine columns of the chart?
Answer: Neutral (flat, sideways) (4 Points) A.4. (4 Points) (Chart 2) At what price level will the Emerging Markets enter a short-term downtrend based on your analysis of the last seven columns of the chart? Answer: 40.0 (4 Points) A.5. (5 Points) (Chart 2) Is the line A-B a valid trend line on the Emerging Markets chart? Answer: Yes. It is a valid trend line on a 1-box reversal chart. (full credit given for yes). (5 Points)
Instructions for A.6. through A.7.

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Between November 2019 and April 2021, the 2 Year US Treasury Note Yield completes an important bottom. Between November 2019 and April 2021, the 2 Year US Treasury Note Yield completes an important bottom. Calculate a price target using Method 1 from du Plessis book, The Definitive Guide to Point and Figure. A.6. (4 Points) (Chart 3) How many columns form the congestion area?
Answer: 10 (4 Points) Method 1 used to calculate the answers to A6 and A7 may be found on pg 208 of the du Plessis book. A.7. (5 Points) (Chart 3) What price target is derived from the calculations above? Answer: 3.8 (5 Points)
Question 2, Part B (20 Points) (Charts 1, 2, 3, 4, & 5) It is February 2022 and you are employed as a Technical Analyst for Cookie Asset Management Company. A new client has asked you to analyze the five charts included in this question. Apply your knowledge of Point & Figure charts and intermarket relationships to the five charts provided. Using only these charts, select the one you believe is most likely to outperform over the next 3-6 months. List three reasons that support your conclusion. A long explanation is not required. Simply state the facts.
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Chart 3
Chart 4
B.1. (5 Points) (Charts 1, 2, 3, 4 & 5) Assuming a deflationary background, which asset among the five is most likely to deliver the best performance over the next 3-6 months? Answer: In a Deflationary Background, Commodities gain from battle against deflation (Intermarket pg. 142). I asked them for four reasons to encourage them not to write long explanations and to give the graders a little extra to work with. (5 Points) B.2. (15 Points) (Charts 1, 2, 3, 4 & 5) List the top three reasons behind your decision. Answer: (Graders, remember only a total of 15 points can be awarded) 1. Crude Oil is the only clear uptrend (the rising trend in Yield represents a falling price for the bonds). Do not give credit more than once for listing any of the other charts and saying they are not in uptrends. (5 Points) 2. Fed fighting Deflation, reluctant to raise interest rates. (Intermarket pg 142) (5 Points) 3. Business Cycle (Intermarket pg 181, 183; figures 12-1 and 12-2) show that bonds turn down first, then stocks, then commodities. In our chart examples Bonds have already turned down (interest rates turn up), thus we should be looking for a peak in equities. While the equity charts havent clearly turned down, they certainly appear flat. (5 Points)
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4. Commodities turn down after stocks. Thus, commodities (in our case Crude Oil, which is closely correlated to Commodities in general and a major component of the GSCI) is the last remaining asset moving higher. (5 Points)
QUESTION 3: Market Breadth (35 Points) Charts 6, 7, & 8

You are a technical analyst at a major brokerage firm covering the US equity markets. In your research, you provide an outlook for the S&P 500 Index using traditional trend and chart pattern analysis combined with market breadth and sentiment indicators. The date is 31 July 2019. You are preparing your monthly technical research update report for the S&P 500. You are using the indicators and charts listed below: 1. A daily close plot chart of the S&P 500 Index with the 50-day and 200-day moving averages (Chart 6) 2. A daily chart of the NYSE cumulative advance decline line (Chart 6) 3. A daily chart of NYSE new 52-week highs and NYSE new 52-week lows (Chart 7) 4. A weekly chart of the Investors Intelligence percentage of bullish advisors minus the percentage of bearish advisors (Chart 8) 5. A daily chart of the 10-day moving average of the CBOE put to call ratio (Chart 8) Question 3, Part A Market breadth: the advance decline line (8 points) (Chart 6) A.1. (2 Points) (Chart 6) Using the daily chart of the S&P 500 Index with the 50-day and 200-day moving averages, what is the
direction of the intermediate-term or 1-year trend of the US equity market as of 31 July 2019? What is the direction of the long-term or 3 to 4-year trend for the US equity market as of 31 July 2019?
Chart 6
Answer: direction of the intermediate-term or 1-year trend = UP (1 Point) direction of the long-term or 3 to 4-year trend = UP (1 Point) A.2. (1 Point) (Chart 6) Analyze the daily chart of the S&P 500 Index and the NYSE cumulative advance decline line. Is market breadth confirming or diverging from the trend for the S&P 500 Index as of 31 July 2019?
Answer: diverging (1 Point) A.3. (5 Points) (Chart 6) What does the pattern for the NYSE Cumulative Advance Decline Line imply about the recent rally for the S&P 500? Is it bullish or bearish? Briefly explain your answer and include an analysis of important turning points for the S&P 500 and advance decline line.
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Answer: What does the pattern for the NYSE Cumulative Advance Decline Line imply about the recent rally for the S&P 500? The new highs for the S&P 500/US equity market were not confirmed by the advance decline line. This suggests that market breadth and/or participation is narrowing and/or decreasing /weakening on the rally. (1 Point) Is it bullish or bearish? Bearish (1 Point) Include important turning points on the charts for the S&P 500 and advance decline line. Chart points: Advance decline line topped out in March/April 2019 with a lower top in July 2019. The S&P 500/US equity market recorded higher highs in April/May 2019 and July 2019. (2 Points) Advance decline line broke through the October and November 2018 lows and is at the lowest level since August 2018. The S&P 500 was trading at much lower levels in October/November 2018 than in July 2019 (2 Points)
Question 3, Part B Market breadth: New 52-week highs and new 52-week lows (10 Points) (Chart 7) B.1. (1 Point) (Chart 7) Analyze the daily chart of the S&P 500 and the NYSE New 52-week Highs. Is market breadth confirming or diverging from the trend for the S&P 500 Index as of 31 July 2019?
Chart 7
Answer: Diverging (1 Point) B.2. (5 Points) (Chart 7) Between May 2018 and July 2019: What does the pattern for the NYSE New 52-week highs imply about the rally for the S&P 500? Is it bullish or bearish? Does your analysis of NYSE New 52-week Highs confirm or diverge from your analysis of the NYSE advance decline line? Briefly explain your answer and include an analysis of the important turning points on the charts for the S&P 500 and New 52-week Highs. Answer: Between May 2018 and July 2019 what does the pattern for the NYSE New 52-week Highs imply about the rally for the S&P 500 The market continued to rally in 2019 but with fewer stocks reaching new 52-week highs, pointing to weakening market breadth. (1 Point) Is it bullish or bearish? Bearish (1 Point) Does your analysis of NYSE new 52-week highs confirm or diverge from your analysis of the NYSE advance decline? Confirms analysis of the Advance decline line (1 Point) The important turning points on the charts for the S&P 500 and new 52-week highs. Chart points: Lower tops for new 52-week highs in April 2019 and July 2019, but higher highs for the S&P 500/US equity market in April/May 2019 and July 2019. (2 Points)
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B.3. (4 Points) (Chart 7) In June and July 2019, what does the pattern for NYSE New 52-week lows suggest about the uptrend for the S&P 500? Is it bullish or bearish? Briefly explain your answer and address the most important levels on the charts for the S&P 500 and new 52-week lows. Answer: In June and July 2019, what does the pattern for NYSE New 52-week Lows suggest about the uptrend for the S&P 500? Pullbacks in the S&P 500 in June and July 2019 have seen a substantial increase in the number of stocks reaching new 52-week lows. In fact, new 52-week lows have reached their highest level (based on the charts provided) at the end of July 2019. More new 52-week lows on pullbacks in the S&P 500/US equity market suggest weakening market breadth. (3 Points) Is it bullish or bearish? Bearish (1 Point)
Question 3, Part C Market sentiment: Bullish and bearish surveys and the CBOE Put/Call ratio Points) (Chart 8)
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C.1. (4 Points) (Chart 8) Within the context of the rally for the S&P 500 that began in January 2016, what does the weekly chart for Investors Intelligence percentage of Bullish Advisors minus the percentage of Bearish Advisors suggest about market sentiment as of 31 July 2019? Include in your answer whether sentiment is too bullish, too bearish, or neutral as well as what this potentially means for the S&P 500 Index. Address important chart points to support your answer.
Chart 8
Answer: Within the context of the rally for the S&P 500 that began in January 2016, what does weekly chart for Investors Intelligence percentage of Bullish Advisors minus the percentage of Bearish Advisors suggest about market sentiment as of 31 July 2019? Sentiment has become more bullish as the market has rallied with peak sentiment readings above 30% for Bulls minus Bears in April/May 2019 and July 2019. (2 Points) Include in your answer whether sentiment is too bullish, too bearish, or neutral as well as what this potentially means for the S&P 500 Index. Too bullish, suggesting that too many investors have already bought into the rally. This suggests that investors may have little buying power left to push market prices higher. This increases downside risk for the market. (2 Points) C.2. (5 Points) (Chart 8) Using the chart for the 10-day CBOE Put to Call ratio, what does the put to call ratio suggest about market sentiment? What are the implications for the US equity market as of 31 July 2019? Is sentiment too bullish, too bearish, or neutral? Does your analysis of the put to call ratio confirm or diverge from your analysis of the Investors Intelligence Sentiment indicator? Address important chart points to support your answer. Answer:
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Using the chart for the 10-day CBOE Put to Call ratio, what does the put to call ratio suggest about market sentiment and what are the implications for the US equity market as of 31 July 2019? The 10-day put/call ratio suggests that as the market has rallied, investors have reduced puts relative to calls. Since put buyers expect the market to head lower or are using puts as a hedge to downside risk, a lower put to call ratio suggests market optimism (a high put to call ratio suggests fear). The 10-day put to call ratio is at the lower end of its range, pointing to optimism or complacency in the US equity market. This increases downside risk to the US equity market. (3 Points) Is sentiment too bullish, too bearish, or neutral? Too bullish (1 Point) Does your analysis of the put to call ratio confirm or diverge from your analysis of the Investors Intelligence Sentiment indicator? Confirms the analysis of the Investors Intelligence Sentiment Indicator. (1 Point) Question 3, Part D Research report: Conclusion and outlook (8 Points) (Charts 6, 7, & 8)
D.1. (5 Points) (Charts 6, 7, & 8) Combining your trend, breadth, and sentiment analysis from Question 3 Parts A, B, and C, what is your outlook for the S&P 500 Index going into August 2019? In your answer address whether you think the market shows signs of a major top, risk for a deeper correction, or a strong uptrend that is set up to continue. Please use bullet points in your answer. Answer: Despite a short-term pullback for the S&P 500/US equity market in the second half of July 2019, the S&P 500/US equity market remains in an intermediate-term and longer-term uptrend. But, market breadth and sentiment increase the risk of a continued pullback off the July 2019 high. Since the trend is up and there are no major signs of a top using traditional chart pattern and trend analysis, we can only conclude from the deterioration in market breadth and recent contrarian bullish sentiment levels that the market is at risk for a correction, but not a major top. At least not yet..(3 Points) Given the magnitude of the deterioration in the advance decline line (and perhaps in new 52-week highs and new 52-week lows as well), the risk is that a correction could extend deeper / more be more significant than prior corrections within the uptrend that began in January 2019. (2 Points) D.2. (3 Points) (Charts 6, 7, & 8) Given your outlook from Question 3D Part 1, what are your three most important levels of downside risk or upside potential in the S&P 500 Index? If you provided a bearish outlook in 3D Part 1, address levels of downside risk. If you provided a bullish outlook in 3D Part 1, address levels of upside potential. Approximate dates and chart levels can be given.
Answer: In this question credit will be given ONLY for levels of downside risk. Chart support at June and April 2019 lows between 1100 and 1050 (1 Point) The rising 200-day moving average at just under 1050 (1 Point)
On a deeper correction, a pullback to the October and December 2018 highs between 1000 and 950 is not ruled out. (1 Point) Other acceptable third support levels are the lows from December 2018 and January 2019 between 950 and 900, the August 2018 lows near 900, and the October 2018 low between 900 and 850. (1 Point)
QUESTION 4: Elliott Wave (15 Points) Chart 9

A U.S. based client of your firm manufactures skateboards. The client has recently contracted to sell a quarterly allotment of skateboards to a retailer in Germany starting in June of 2011. The U.S. company will be paid on delivery each quarter in a set amount of Euros. You are asked to give a technical opinion of the Euro based on your knowledge of Elliott Wave Theory and Fibonacci analysis and give a recommendation as to whether the client should take steps to hedge the currency risk and how he might best do that. Your responses should take the calculation out to four decimal points. Because this is a monthly chart, some wave details may not be visible. In real life, the analyst would be able to check weekly and daily charts to confirm counts. Please make a note of any assumptions in wave count that you make because of this. A. (5 Points) (Chart 9) Using the attached monthly chart of the nearby Euro futures contract, give your Elliott wave analysis starting from the low in 2000. Identify the start and end points for an intermediate degree motive and corrective waves and corrective patterns along with the start and end points from any minor degree subdivisions and any Fibonacci relationships that help confirm your analysis.
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Answer: (Two answerers included) Wave (1): .8259 -.9599 Wave (2): .9599 - .8344 Wave (3): .8344 1.2885 Wave (3) subdivisions Wave 1: .8344 - .9302 Wave 2: .9302 - .8555 Wave 3: .8555 1.1926 Wave 4: 1.1926 1.0773 Wave 5: 1.0773 1.2885 Length =.618 x length of Wave 3 Wave (4): 1.2885 1.1665 Wave (4) subdivisions Wave A: 1.2885 1.1760 Wave B: 1.1760 1.3480 Wave C: 1.3480 1.1665 Wave (5) : 1.1665 - 1.5964 (The subdivisions of Wave (5) on the monthly chart are not clear enough to determine a clear internal labeling of this Wave.) The top of Wave (5) is targeted by a line drawn from the top of Wave (3) that is parallel to a line connecting the lows of Waves (2) and (4). Wave (3) obeys the rule as it cannot be the shortest wave of Waves (1), (3), and (5). (5 Points)
The larger degree corrective wave appears to be a contracting triangle with five overlapping Waves, each made up of 3-wave structures. The standard Fibonacci relationship between Waves of a contracting triangle is for alternate Waves to be related by .618 however these Waves exceed that measurement. The entire corrective pattern has retraced back into the area of the previous Wave (4) (3 Points) Wave A : 1.5964 1.4108 Wave B : 1.4108 1.5045 Wave C : 1.5045 1.1924 Wave D : 1.1924 1.4225 Wave E : 1.4225 end has not been completed, but if Wave E is equal to .618 of the length of Wave C (the alternating wave) then a target for Wave E would be 1.2305. It is possible for Wave E to over- or undershoot the line connecting the lows of Waves A and C. ALTERNATIVE COUNT: (2 Points) An alternative count could have the move up as an ABC of a larger correction because the length of Waves (3) and (5) are almost equal. Using this count : Wave (A): .8259 1.2885 Wave (B): 1.2885 1.1665 Wave (C): 1.1665 - 1.5964 The count for the triangle retracement would be the same as the earlier scenario. B. (5 Points) (Chart 9) Given your analysis, what is the most likely future path for the Euro? Answer: To complete the corrective pattern, Wave E should complete a wave c move to the downside. A typical Fib relationship would make Wave Ec equal to Wave Ea at 1.2517. If Wave E is equal to .618 x Wave C (alternative wave Fib relationship) then Wave E would end at 1.2295. That is the target for the end of Wave E although the analyst should be watchful for the possibility of a throwever of a line connecting the lows of Waves A and C. After Wave E ends, look for the market to move higher, exceeding the high of Wave (5) with a triangle target of 1.714. If the next move is equal in length to the initial 5-wave move off the low in 2000, the market could approach 2.0000. (5 Points) C. (5 Points) (Chart 9) What might be the best hedging strategy for your client? Remember, your client has entered into an agreement with the buyer to be paid a set amount of money in Euros. The directional risk of the Euro is now his. How would you recommend he hedge this risk in the Euro given your Elliott Wave Analysis? Answer: Strategy: Recommend shorting the number of contracts of the Euro equivalent to the current value of the entire sale for the year as a hedge against lower Euro prices. Keep the hedges on until the end of Wave E
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is confirmed. If a quarterly sale is completed before this occurs, the hedge for that quarters transaction should be lifted when the Euro funds are received by the client. (5 Points)
QUESTION 5: Bar Charts with MACD and Stochastics (30 Points) Charts 10, 11, 12, & 13
As Chief Technical Strategist for a long/short hedge fund, you have been asked, by the firms CIO, to prepare a technical analysis report on the below Dow Jones Indexes. Using the following charts, summarize the important technical observations and determine whether the index should be bought or sold or if no action is recommended at this time. Please include the following in your analysis of the below charts: Price action, Bollinger Bands, Stochastics, MACD interpretation and your recommendation to buy, sell, or hold. 1. Dow Jones Transportation Average (Chart 10) 2. Dow Jones Industrial Average (Chart 11)
3. Dow Jones Utility Index (Chart 12) 4. Dow Jones REIT Index (Chart 13) A. (8 Points) (Chart 10) Technical analysis of the Dow Jones Transportation Average. Buy, sell or hold?
Chart 10
Answer: Price Action: Double top formation in place. (1 Point) Price made a new low (lower low) on the current bar. (1 Point) Price is riding the lower Bollinger Band indicating increased momentum. (1 Point) Bollinger Bands: Bands are expanding (widening) indicated increased volatility. (1 Point) The moving average has turned down indicating a bear trend. (1 Point) Stochastic: Failed bullish crossover leaves the indicator spending extended time in oversold territory, indicating prolonged weakness. (1 Point) MACD: Indicator in a downtrend with the histogram making a new low. (1 Point) Analysis: All indicators and price action point to continued weakness. Index should be sold. (1 Point)
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B. (7 Points) (Chart 11) Technical analysis of the Dow Jones Industrial Average. Buy, sell or hold?
Chart 11
Answer: Price Action: Potential double bottom has formed but no trend change is indicated yet. (1 point). The most recent bounce has failed at the downward sloping moving average. (1 Point) Bollinger Bands: Bands are wide and starting to flatten indicating range bound price action or a base forming. (1 Point) Stochastic: Indicator continues to point up from an oversold buy signal. (1 Point) MACD: Indicator continues to point down but is showing a bullish divergence (higher low) with the price action. (1 Point) Histogram is ticking towards zero, indicating a potential buy signal is developing. (1 Point) Analysis: Mixed signals among the price action and indicators leads to no direction trade recommendation at this time; ie no action recommended. (1 Point)
C. (7 Points) (Chart 12) Technical analysis of the Dow Utility Index. Buy, sell or hold?
Chart 12
Answer: Price Action: A clear head and shoulders bottoming pattern has formed and price has broken the neckline to confirm an uptrend. (1 Point) Price is riding the upper Bollinger band indicating increasing momentum. (1 Point) Bollinger Bands: Moving average and the bands both point up. (1 Point) The bands are expanding indicating increased volatility in the direction of the trend. (1 Point) Stochastics: Indicator has been moving sideways in overbought territory indicating prolonged strength. (1 Point) MACD: Points up and indicates an acceleration based on the recent near crossing. (1 Point) Analysis: All signs point up. Index should be bought. (1 Point) D. (8 Points) (Chart 13) Technical analysis of the Dow Jones REIT Index. Buy, sell or hold?
Chart 13
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Answer: Price Action: Head and shoulders bottoming pattern formed indicating the trend has turned up (1 Price has pulled back to bullish support at the BBand moving average & H&S neckline (1 Bollinger Bands: The bands are converging indicating slowing volatility which will set up the next move (1 Stochastics: Bullish crossover at the 50 level indicates a strong market that can turn up in the middle Point). The indicator is showing a positive reversal signal (1 Point). MACD: Very close to turning up and giving an intermediate term buy signal (1 Point). The indicator is showing a positive reversal signal (1 point). Analysis: Indicator and price action agree that this market is anticipated to drift higher. This index bought (1 Point).
Point). Point) Point). of the range (1
should be
QUESTION 6: Dow Theory Confirmation (15 Points) Chart 14

It is the year 2018, and you have just been awarded the Charles H. Dow Award by the Market Technicians Association. You are a seasoned analyst and enjoy a fair amount of respect among your peers and the public. At the cocktail party prior to the awards ceremony, you find yourself quizzed by some of the senior Technical Analysts at the party. They ask you an open ended question, Does the Dow Theory
work? You are wondering, why is this question coming up here at the Charles H. Dow Award function, minutes before you are going to be called up to the podium to deliver a speech. You say, Well it depends. The market is always at work and the Dow Theory provides actionable points as well as pauses when no action should be taken. They smile and provide you with chart 14. A. (5 Points) (Chart 14) In the Rectangle marked B corresponding to a Primary Trend reversal formation during 2007-2008, which of the three points from W, X or Y best explain the concept of averages must confirm and why? Contrast very briefly why the other two points do not explain well the concept of averages must confirm.
Chart 14
Answer: A near vertical collapse in prices is indicative of the market absorbing rapidly the expectations of a coming bad economy phase that may include a recession, severe macroeconomic events etc. A rapid movement in prices is in no way an evidence of Averages Not Discounting Everything. On the contrary if prices are sluggish and slow to move it is much more difficult to explain what are the anticipations on which market is refusing to move. The point Y best explains the concept of Averages must Confirm since it is only at this point that the Transportations breaks below a previous important comparable low even while the Industrials produced lower top and lower bottom earlier. The confirmation of a lower top and lower bottom on the Transports came at only this point. The point W is an ongoing series of rising tops and
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bottoms for both averages. The point X is a point of a Non confirmation or divergence where Transportations made a higher high while Industrials made a lower high. (5 Points) B. (5 Points) (Chart 14) In reviewing the two rectangles marked A and C corresponding to the bottom formations during 2002-2003 and 2008-2009, which one has a clearer case of Dow Jones Transportation Average not confirming the Dow Jones Industrial Average? Why? Answer: Box A illustrates that the Transportation average does not confirm the Industrial average. The reason is that as the Transportations made a lower low in early 2003 and the Industrials made a higher low, which is a non-confirmation. (5 Points) C. (5 points) (Chart 14) In the chart of the first decade of the 21st century, the Dow Jones Transportation Average has not led the Dow Jones Industrial Average at any primary reversal as marked in boxes A, B & C. Is this important and does it indicate anything about the usefulness of Dow Theory in todays economic environment? Does the chart validate or invalidate Dow Theory? Answer: I agree that in this decade / chart the Transportations have not led the Industrials at any of the three big reversals. The fact that this observation could have important considerations for how the relationship between the two important averages may have been evolving over time may be true yet there may not be any important connotations for the future usage of the Dow Theory. When the Dow Theory was developed the Transportations were the chief business beneficiaries of the war. The idea central to Transports being the leading average most of the time was that if underlying businesses are to do well, the prospects for the Transportation providers had to be as good. With the evolution of the economy there are now varieties of services providing companies that are part of the Industrials Average that may perhaps prosper and blossom with the fortunes of the Transportation companies. The broad idea that the state of affairs of the Transportations and the Industrials are inter-linked closely and some lead or lag is acceptable would nevertheless remain at the centre of the Dow Theory and it is not a prescribed rule as per Dow Theory that any average must lead the other, but just that the Averages must confirm. (5 Points)
QUESTION 7 Candlestick Analysis (40 Points) Charts 15, 16, 17, 18 & 19
(Please do not use Elliott Wave analysis to answer this question. No points will be awarded for Elliott Wave analysis on this question.) 1. 2. 3. 4. 5. Hang Seng Index (Chart 15) Shanghai Exchange weekly (Chart 16) Shanghai Exchange daily (Chart 17) Nikkei 225 (Chart 18) CAC 40 (Chart 19)
A. (8 Points) (Chart 15) As a technical analyst, would you give a short-term to intermediate-term buy or sell recommendation on the Hang Seng Index (HSI)? Why?
Chart 15
Answer: Key: Sell. (3 Points) The Bearish Belt Hold on 7 January 2009 was by itself a bearish signal, (1 Point) especially when it reached the former resistance level at 11 December 2008 and accompanied extremely high volume. (1 Point) 7 Jan 2009 together with 11 Dec 2008 formed a Double-Top which was a significant bearish signal. (1 Point) Meanwhile, in Stochastics, the faster moving average (%K) crossed under the slower moving average (%D) at overbought level. (1 Point) The bearish trend was further confirmed by the dead cross when the 4-day moving average crossed under the 9-day and 18-day moving averages (1 Point) and the following Three Black Crows which could not break the resistance of 4-day moving average (1 Point). Last but not least, both the Stochastics and the Relative Strength Index (RSI) kept dropping. Although Stochastics reached oversold level in the second week of Jan 2009, it was not confirmed by the RSI, on
P a g e 33
the other side, the record high volume on Jan 14 after the Three Black Crows expressed dominant overall pessimism, and trend in the following days did not show signals of rally. (1 Point) The fact was that HSI kept falling and dropped from 13,340 to 12,579, or -5.7%, in the following four trading days to the Chinese New Year holiday, and continued the retracement till March 9 at 11,345. (1 Point)
B. (12 Points) (Chart 16 & 17) Would you project a bullish or bearish trend on the Shanghai Exchange Composite Index (SECI)? List and discuss at least four technical signals to support your conclusion.
Chart 16
Chart 17
Answer: Bearish (4 Points) 1. The second week of October saw an opening near 6,000 but closed bearish at around 5,800, meanwhile, the Relative Strength Index (RSI) was at overbought level on both Weekly and Daily charts. On Daily chart, after the three consecutive days closing above 6,000 (Oct 15-17), a significant one-day
2. 3. 4.
5.
6.
retracement of over 200 appeared on Oct 18 with a bearish MACD breakout the same day. (2 Points) The index reached the significant resistance level of 6,000 twice on Oct 31 and Nov 1 but could not break out. (2 Points) The failed breakout was immediately followed by Three Black Crows in the next three trading days. At the same time, a failed MACD upside breakout could be seen on daily chart. (2 Points) MACD bearish crossover appeared in the second week of November on Weekly chart with constantly decreasing RSI. In the same week, index decreased by over 400, including a daily Bearish Belt Hold of over 200 points on Nov 8. Daily MACD also crossed under 0 in the middle of the week. (2 Points) The index further broke 5,000 on Nov 22, at the same time the RSI was at lower low and MACD kept decreasing on both Weekly and Daily charts, one week later it reached the resistance of 5,000 twice on Nov 29-30 but failed to break out again (2 Points) The fact was that SECI decreased from 4,872 to 4,321 in two months (on 1 February 2008) after an intermediate-term rally in December 2007 and early January 2008. The 6,124 achieved on 16 October 2007 is the highest point ever for SECI, the lowest point after that was 1,665 on 28 October 2008. The index was at between 2,300 and 3,300 the whole year of 2010 and early 2011. (2 Points)
C.1. (4 Points) (Chart 18) List at least four successful reversal candlestick patterns in the chart.
Chart 18
Answer: 1. Bullish Harami on Jan 15-16 (1 Point) 2. Morning Star on Jan 23, 26 and 27 (1 Point) 3. Bearish Engulfing on Feb 6 and 9 (1 Point) 4. Hammer(Doji) on Feb 24 (1 Point) 5. Morning Doji Star on Mar 9, 10 and 11 (1 Point) C.2. (8 Points) (Chart 18)
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Would you give a buy or sell recommendation on the Nikkei 225? Explain your rationale using technical analysis. Answer: Key: Buy. (3 Points) The Morning Doji Star appeared on March 9-11, especially after a lengthy downtrend and ended with a Bullish Belt Hold with an upside window, is a strong reversal signal. (1 Point) In Stochastics, there was also a golden cross when %K crossed over %D at oversold level and kept going up to over 50. (1 Point) The Bullish Belt Hold on Mar 11 had support at 4-day moving average whereas met resistance at 18-day moving average. (1 Point) However, two days later another Bullish Belt Hold broke the 18-day MA resistance with the highest volume in the past two months, (1 Point) and in the same day a golden cross was found when the 4-day moving average crossed above the 9-day and 18-day moving averages for the first time in two months. (1 Point) The overbought level of Stochastics after Mar 13 was a potential reversal signal to watch, but it was not confirmed by other indicators, one might wait for a couple of more days to monitor the trend of moving averages as well as candlestick patterns and volumes. (1 Point) The fact was that Nikkei 225 started a bull cycle and rose from 7,949 on March 17 to over 10,000 within three months. (1 Point) D. (8 Points) (Chart 19) Would you project a bullish or bearish trend on the CAC 40 based on your technical analysis of this chart? Please support your analysis using candlestick patterns, volume, Bollinger Bands, MACD interpretation and Stochastics.
Chart 19
Answer: Key: Bearish. (2 Points)

Candlestick patterns in April: Tweezers Tops on 12th, 14th, 15th and 16th (1 Point); Evening Doji Star on Apr 23rd, 26th and 27th (1 point); Two Bearish Belt Hold on Apr 21st and 27th (1 Point); etc. Volume: Starting April it became apparent that volume was lower when price closed high and higher when price closed low. (1 Point) Bollinger Bands: On April 27, the closing price exceeded the lower band. Considering the mild trend in past two months, the breakout could be significant signal that the downtrend could be expected to continue, as the momentum was strong enough to drive the price further. (1 Point) MACD: MACD first crossed under Signal Line, then crossed under zero on Apr 27. (1 Point) Stochastics: After being above overbought level for about 45 days, %K crossed under %D at overbought level and kept going down. (1 Point) The fact was that CAC 40 fell from 3,845 to 3,393, or -11.8%, within the following eight trading days. (1 Point)
QUESTION 8: Sentiment (15 Points) Charts 20, 21, & 22

You are working as a technical analyst at a large pension fund. The fund invests in U.S. equities, government bonds, and cash equivalents. The Chief Investment Officer is considering changing equity exposure within the fund. You are asked to assess the mood of the market by analyzing several sentiment indicators. A. (3 Points) (Chart 20) Analyze chart 20. What does the current reading of consumer confidence imply? What does this type of reading typically mean for future stock returns?
Chart 20
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Answer: The chart shows that consumers are extremely pessimistic about the future. (1 Point) Extreme levels of consumer pessimism have historically been bullish for stocks. (2 Points) B. (3 Points) (Chart 21) Analyze chart 21. What is the meaning of the current reading of the Advisory Service Sentiment survey, conducted by Investor Intelligence? What does this type of reading typically mean for future stock returns?
Chart 21
Answer: The current reading shows that 47% of newsletter writers, surveyed by Investors Intelligence are bullish. (1 Point) Historical stock returns are high once this survey reaches a pessimistic extreme and reverses as it has in chart 8B. (2 Points) C. (3 Points) (Chart 22) Analyze chart 22. What does the VIX measure? What does the current reading suggest about future stock returns?
Chart 22
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Answer: The VIX measures the volatility implied by options traders in their pricing of S&P 500 options in the market place. (1 Point) High VIX readings occur at periods of stress, emotion, uncertainty, fear, and nervousness often associated with panic bottoms. The high current reading is a sign of extreme pessimism and has historically led to above-average market returns. (2 Points) D. (6 Points) Would you recommend that the CIO increase equity exposure, decrease equity exposure, or leave the current equity allocation unchanged based on your analysis of the three charts? Why? Answer: Analyst should recommend that the CIO increase equity exposure. (2 Points) All three sentiment indicators were showing extreme levels of pessimism. By definition a bottom in the market is the point of maximum pessimism. Whenever the nonprofessional (as measured by the three sentiment indicators) investor becomes one-sided in their expectations about the future course of stock prices, the market will move in the direction opposite that which is anticipated by the masses. With all three indicators reaching extremes and then reversing, the technician can be more confident in his recommendation to the CIO to increase equity exposure. (4 Points) Source: Technical Analysis, Chapter 7
QUESTION 9
Behavioral finance (10 Points) Chart 23

A. (5 Points) (Chart 23) Does the information in chart 23, support or discredit the efficient market theory? Why?
Chart 23
Answer: The chart discredits the efficient market hypothesis. (1 Point) The chart shows a historical relationship between price-earnings ratios and subsequent long-term returns. This flies in the face of the efficient market hypothesis assertion that all financial prices accurately reflect all public information at all times. (4 Points) Source: Taken directly from Robert Shiller, Irrational Exuberance, Chapter 10, pg 185-188 B. (5 Points) In a famous 1996 speech, Alan Greenspan posed this rhetorical question: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" He then added that "We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability."
P a g e 41
Does Professor Shiller agree with this assertion that central banks should not concern themselves with speculative bubbles? Why? Answer: No Professor Shiller does not agree with this assertion. (1 Point) He states that a small, but symbolic, increase in interest rates by monetary authorities at a time when markets are perceived by them to be overpriced is a useful step, if the increase is accompanied by a public statement that it is intended to restrain speculation. (4 Points) Source: Irrational Exuberance, Chapter 12, pg 224

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QUESTION 1: Ethics (30 Points)

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Instructions for A.6. through A.7.

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QUESTION 3: Market Breadth (35 Points) Charts 6, 7, & 8

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QUESTION 4: Elliott Wave (15 Points) Chart 9

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Point). Point) Point). of the range (1

QUESTION 6: Dow Theory Confirmation (15 Points) Chart 14

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Answer: Key: Bearish. (2 Points)

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QUESTION 8: Sentiment (15 Points) Charts 20, 21, & 22

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Behavioral finance (10 Points) Chart 23

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