CMT Level II 2019: The Theory and Analysis of Technical Analysis

Explain the six basic tenets of Dow Theory
Diagram the three phases of bull and bear markets
Differentiate between primary, secondary, and minor trends
Examine a chart for support and resistance
Demonstrate the use of trendlines in identifying trends, support and resistance, and channels
Interpret trend signals using trendlines
Compare different types of gaps and their significance
Contrast various continuation patterns and reversal patterns
Draw examples of various top formations and bottom formations
Apply price objectives to various chart pattern and trend breakouts
Interpret candlestick formations for signals
Contrast various types of moving averages used in trend analysis
Illustrate four ways moving averages are used by technicians
Analyze trend movement using Directional Movement Indicators
Compare common envelope, channel, and band indicators
Examine methods for forecasting price direction
Calculate a simple approach to momentum
Inventory various weighting methods for moving averages
Explain the drop-off effect and its impact on technical indicators
Explain three reasons why trend systems work
Determine appropriate asset selections based on trend and forecast
Generalize how buy and sell signals are used with indicators and tools for measuring trend, such as: Moving Averages, Bollinger Bands, Keltner Channels, Percentage Bands, Volatility Bands, and combinations of bands and other indicators
Describe how to apply the 10-day moving average rule in a trading system
Explain how a trader or investor would go about selecting the right moving average to use
Explain the role of each moving average in a two-trend or three-trend method of trading
Describe two general rules for generating an exit signal when using moving averages, and explain which one of the two is considered better than the other
Differentiate between momentum and rate of change studies in technical analysis
Distinguish among various calculations of momentum
Demonstrate use of momentum for trend indication and associated signals
Demonstrate use of momentum for finding price extremes and associated signals
Illustrate the use of MACD to generate trading signals
Compare various oscillators and their trading signals including RSI, stochastics and TRIX
Use standard interpretation of volume and open interest in the context of price trends in stocks and futures
Compare various volume indicators such as On-Balance Volume, Accumulation Distribution and VWAP
Analyze changes in breadth in the context of price trends
Interpret breadth indicators such as the McClellan Oscillator
Interpret indicators that combine breadth with volume such as Arms Index and Thrust Oscillator
Critique the controversy over whether tradeable patterns exist in technical analysis
Appraise the influence that computer technology has had on the study of patterns
Diagram classic chart patterns such as triangles, and double and triple tops and bottoms
Draw rounding chart patterns such as head-and-shoulders
Illustrate “half-mast” chart patterns such as flags and pennants
Analyze reversals in longer-term trends using short-term price patterns
Interpret the significance of various types of gaps that occur on price charts
Compare and analyze wide-range and narrow-range bars and their implications for volatility
Diagram one and two-bar reversal patterns
Draw common candlestick patterns and analyze their significance within a trend
Interpret market psychology from candle shapes
Diagram and interpret notable individual candles such as hammer, hanging man and doji
Explain the importance of such candles in the context of trends
Differentiate between the buying and selling activity represented by real bodies and shadows in these candles
Diagram and interpret notable patterns formed by multiple candles such as engulfing, stars, and windows
Demonstrate the importance of the prevailing trend when interpreting candle patterns
Differentiate between the buying and selling activity represented by real bodies and shadows in these candle patterns
Interpret candle patterns for support and resistance
Analyze candle patterns on charts for indications of trend reversal and continuation
Interpret candle patterns for support and resistance indications and confirmation
Illustrate how to combine Western chart analysis with candles
Employ candlestick analysis for risk management
Demonstrate using candles in multiple time frames
14 Applied Cycle Analysis
Calculate single-day implied volatility
Analyze how put-call parity and options supply and demand affect VIX
Interpret VIX as an indication of market sentiment
Interpret changes in VIX as part of a market forecast
Calculate expected 30-day movement of an index or a stock
Compare utility theory and prospect theory
Describe loss aversion
Describe the single greatest limitation of prospect theory
Describe each of the four perception biases covered in this chapter
Illustrate how each of these biases might affect investor behavior
Describe each of the three inertial effects covered in this chapter Illustrate how each of these might affect investor behavior
Compare Pearson’s and Spearman’s methods
Describe the importance of linearity and normality to useful correlation studies
Analyze the effect of outliers on a regression study
Interpret values generated by regression, multiple regression and tolerance calculations
Review the process of selecting meaningful predictor variables for multiple regression studies
Analyze the concept behind the ARIMA method
Describe the ARIMA process
Employ the results of the ARIMA forecast to generate trading signals
Demonstrate use of linear regression to generate trading signals
Illustrate the use of linear regression for relative strength studies
Explain the basic concepts of intermarket analysis
Interpret the rotation of stocks, bonds and commodities in the typical business cycle
Describe methods of determining intermarket relationships
Illustrate the importance of measuring correlation for portfolio diversification and asset selection
Illustrate a general approach to a momentum strategy using relative strength
Analyze the use of hedging and non-correlated assets in a long-only relative strength model
Define an environmental model
Contrast internal and external indicators
Sketch the basic components of Davis’ Fab Five model
Categorize each of the four indicators in Zweig’s original model as internal or external
Categorize the additional indicator in the modified version as internal or external, trend following or mean reversion
Differentiate between alpha and beta
Compare the Efficient Market Hypothesis with general concepts in behavioral finance and with the Adaptive Markets Hypothesis
33 The Statistics of Backtesting
Appraise the possibilities and challenges of applying the scientific method to traditional technical analysis
Analyze the three forms of the EMH as to their information content
Explain “null hypothesis” as used in the scientific method
State the five stages of the hypothetico-deductive method
Critique the three consequences, articulated in this chapter, of adopting the scientific method in technical analysis
Analyze why the existence of nonrandom price motion is a premise of technical analysis
Describe an “efficient market”
Discuss behavioral finance as a theory of nonrandom price motion
Illustrate the two foundations of behavioral finance
Interpret feedback loops in price action
Describe data mining and data-mining bias in testing trading rules
Define and discuss data-snooping bias in testing trading rules