Sample Questions for CMT Level III

Book 2

Table of Contents 1 = ETHICS (30 Points) 2 = POINT & FIGURE/INTERMARKET ANALYSIS (50 Points) 3 = MARKET BREADTH (35 Points) 4 = CHARTS WITH OSCILLATOR (30 Points) 5 = ELLIOTT WAVE (15 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. 9. Take care when reviewing your answers not to elect exit unless or until you are ready to close your exam session. It will not be possible to reschedule your appointment this administration.

QUESTION 1: Ethics (30 Points)

A. (5 Points) Sanjay and Rajesh are technical analysts at Kola Investment. Both are CMT charterholders. Sanjay covers commodities and Rajesh covers stocks. They work in a department with six other technical analysts and about 20 fundamental analysts. Both Sanjay and Rajesh are being considered for the position of Chief Technical Analyst for their firm. This is a highly desirable situation and both men want this position. Sanjay writes a report to illustrate his competency and in it he focuses on the use of Elliott Wave (EW). He refers to his use of EW and the differences between his use of EW and on Rajeshs misuse of EW. What if any violation has occurred? Answer: Violation of Code 4: Members and Affiliates shall not publish or make statements which indefensibly disparage and discredit the analytical work of others. Sanjay should not have referred to Rajesh use of EW. (5 Points) B. (5 Points) Rebecca is a CMT Level 2 candidate studying for her CMT Level 3 examination. She works for Work-a-Day Commodity Reports Inc. in Chicago, which publishes daily market opinions regarding the equity markets and weekly opinions for the commodity markets. Yesterday, she had a deadline to publish a report on corn and other agricultural futures. Due to the nature of the extensive analysis involved and the time constraints placed on the projects, Rebecca borrowed some verbiage from an article produced by the US Government on plantings. What if any violation has occurred? Answer: Violation of Code 8: Members and Affiliates shall not copy of 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. Rebecca plagiarized work and is in violation.(5 Points) C. (5 Points) Abdul, a CMT, works for Gushers Oil Company as an Energy analyst. He noticed some strange activity in the crude oil futures market. There was a substantial upward move in the pricing of the product and the products moved from contango to steep backwardation. Abdul advises his company that the price of crude will rise in the near future. What if any violation has occurred? Answer: This is a tricky question in that, for those who understand the futures market the recommendation would have been made because of strong demand for the front month as in conditions of backwardation. Thus if that explanation is given there was no violation.

Alternate answer is that there was a violation of Code 3: Members and Affiliates shall not publish or make statements concerning the technical position of a security, a market or any of its components or aspects unless such statements are reasonable and consistent in light of the available evidence and of the accumulated knowledge in the field of financial technical analysis. New methods of technical analysis and modifications of existing concepts and techniques shall be fully documented as to procedure and rationale. Proprietary methods shall not be infringed, but this standard shall be a guide in the creation of proprietary products. (5 Points) D. (5 Points) John and Jeff are trading partners at Mac Trade. They both are CMT charterholders. John says to Jeff; I hear that Mr. Black is leaving the firm and is being hired by Consolidated Traders. This action could cause a problem at Mac Trade. Jeff turns to John and asks where he heard that information. John tells Jeff that his sister Coleen was dating Mr. Blacks son and that Blacks son told her about that information. Jeff says, Yeah, but it is true or just some kids imagination going wild? John answers, Why would he tell Coleen the name of the new firm if it were just his imagination? John and Jeff buy Consolidated Traders calls and Mac Trade puts . What if any violation has occurred? Answer: Violation of Code 5: Members and Affiliates shall not seek, disseminate or act on the basis of material, nonpublic (inside) information, if to do so would violate the laws and regulations of any government, governmental agency or regulatory organization relating to the use of inside information. Both John and Jeff traded on inside information.(5 Points) E. (5 Points) Andreas, a CMT, is writing a report on the value of volume in studying the behavior of the CAC 40. He borrows some information from his friend Jorges study published in an obscure journal about ten years ago. Jorge died in an auto wreck several years ago. Andreas simply forgets to footnote this paragraph. What, if any, violation has occurred? Answer: Violation of Code 8: Members and Affiliates shall not copy of 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. Andreas plagiarized Jorges work.(5 Points) F. (5 Points) Alfredo, a CMT, is the director of technical analysis at Thor Securities, LLC, a small client oriented broker dealer in Gotham City. In his role as Director, Alfredo supervises a group of four analysts who issue reports on the markets. Recently, he spoke about Alan spending a lot of time with Jodi and about their romantic involvement. Jodi is the new receptionist at the firm. Alfredo offered his opinion about the viability about the relationship he believed to exist before continuing on to discuss new company business, recent market activity in the Energy Sector, and recent current world events.

What, if any, violation has occurred. Answer: Members and Affiliates shall keep in confidence knowledge concerning the lawful private affairs of both past and present clients, employers, and employers clients. Confidentiality! (5 Points)

QUESTION 2: Parts A and B POINT AND FIGURE/ INTERMARKET ANALYSIS (50 Points) Charts 1, 2, & 3
Part A (P&F Identification) (30 Points) Part B (Intermarket Analysis) (20 Points) Charts provided: 1. Antarctic Equity Market Index (Chart 1) 2. Antarctic Industrial Metals Index (Chart 2) 3. Antarctic Broad Commodity Index (Chart 3) Editors Note: the numbers on the attached charts indicate the beginning of a calendar month. 1 being 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 & 3) Instructions for A.1. through A.6. Referring to the three charts listed above, answer the following questions. Your answers should be brief. In most cases, the correct answer is a single number or a brief sentence.

A.1. (5 points) (Chart 1) On the Antarctic Equity Market Index there is a congestion pattern between August and September 2048. Using Method 1 (du Plessis) to calculate the horizontal count, what is the width of this pattern? Answer: 12 Du Plessis states that one counts the entire width of the pattern (pg 208). (5 Points)

A.2. (5 points) (Chart 1) On the Antarctic Equity Market Index there is a congestion pattern between August and September 2048. Using Method 1 (du Plessis) to calculate the horizontal count, what is the anchor point of this pattern? Answer:

44.7 Du Plessis states that the anchor point is the row that has the most filled boxes (pg 208). The row at 44.7 has one more filled in box than 44.4. (5 Points) A.3. (5 points) (Chart 1) On the Antarctic Equity Market Index there is a congestion pattern between August and September 2048. Using Method 1 (du Plessis) to calculate the horizontal count, what is the target price of this pattern? Answer: 48.3 (Note this is two boxes above the top of the chart, but the box size is stated to be 0.3, so I dont think this extra bit of math is a heavy burden). Du Plessis states that one adds the width of the pattern to the anchor point (pg 208). (5 Points) A.4. (5 points) (Chart 3) On the Antarctic Broad Commodity Index chart, the most recent data shows a short term uptrend. If price began to decline, at what price level would the trend change to Neutral? Answer: 66.4 (5 Points) A.5. (5 points) (Chart 3) On the Antarctic Broad Commodity Index chart there is a congestion pattern between late November 2048 and January 2049. Using Method 1 (du Plessis) to calculate the horizontal count, what is the anchor point of this pattern? Answer: 69.6 Du Plessis states that the anchor point is the row that has the most filled boxes (pg 208). The row at 44.7 has one more filled in box than 44.4. (5 Points) A.6. (5 points) (Chart 3) On the Antarctic Broad Commodity Index chart there is a congestion pattern between late November 2048 and January 2049. Using Method 1 (du Plessis) to calculate the horizontal count, what is the target price of this pattern? Answer: 62.4 9 columns counted down from 69.6 (anchor point) Du Plessis states that the anchor point is the row that has the most filled boxes (pg 208). The row at 44.7 has one more filled in box than 44.4. (5 Points) Question 2, Part B (20 Points) (Charts 1, 2, & 3)

It is February 2049 and you are employed as a portfolio manager at Mariana Trench Asset Management Company. You are making a presentation to a new client. The client asks whether you expect to be overweight or underweight equities over the next six months. Your focus is only the equity portion of the account. B.1. (5 Points) (Charts 1, 2, & 3) Apply your knowledge of Point & Figure charts and intermarket relationships to the three charts provided. Assume you are in an inflationary economic period. Using only these three charts, determine whether you think it best to be overweight or underweight the Antarctic Equity Market Index over the next 6 months. Your answer is a simple Overweight or Underweight. Answer: Overweight. (5 Points) B.2. (15 Points) (Charts 1, 2, & 3) List three reasons that support your conclusion in B.1 above. A long explanation is not required. Simply state the facts. Answer: The grader may accept any of the quotes listed below or any other relevant quote. The key to this question is the emphasis on Industrial Metals compared to the Broad Commodity index. Murphy reviews the intermarket relationships in an inflationary period early in the book. He does not make a strong statement linking general commodity prices with equity market prices (at least not that I saw in this section of the book). But on page 41, under the section heading "Bonds Peak Ahead Of Stocks" he begins with Commodity prices affect the direction of bond prices. There is no bond price or yield chart included in this question, so the candidate is left to deduce from the commodity charts what the bond prices are doing. Again on pg 41 Rising bond prices are positive for equity prices. The candidate might wonder which commodity chart to use, but Murphy clarifies the issue of which is the appropriate chart: "Industrial commodities trend in the opposite direction of bond prices" (Intermarket, pg 38) "Bond and copper prices usually trend in opposite directions" (Intermarket, pg 38, 3.3) "Watch Industrial Prices" (Intermarket, Heading pg 34) "The CRB Index is often influenced by agricultural markets. ... Agricultural markets, however, are more often affected by weather than economic trends." (Intermarket, pg 34, 35) (5 Points) caption Fig

That last point is the crucial one. The broad commodity index in our question is rising, so one might expect bond prices to be falling. However, the Industrial Metals chart is very clearly declining. In a case where the two disagree, Murphy is clear that one must emphasize the Industrial Metals chart. With Industrial Metals in a clear downtrend, we must assume that bond prices are rising. Thus, with a six month time horizon, we must assume that equities (which are flat) will benefit from the rising bond prices. Equities should be over weighted. (5 Points)

QUESTION 3: Parts A, B and C MARKET BREADTH (35 Points) Charts 4, 5, & 6 Please note that no credit will be given for an Elliott Wave analysis in this question. Points shall be awarded only for answers focused on Market Breadth.
Part A (11 Points) Part B (10 Points) Part C (14 Points) Question 3, Part A (11 Points) (Chart 4) Analysis of the cumulative advance-decline line Use Chart 4: The S&P 500 with the cumulative NYSE advance-decline line. You are a senior technical analyst at a regional broker-dealer. A junior analyst on your team shows you a price chart of the S&P 500 and has drawn a broadening top pattern (see top of Chart 4) that has been developing since November 2024. He believes that the S&P 500 is forming a significant top. You ask the junior analyst to add the NYSE cumulative advance-decline line to the chart (see bottom of chart 4), so that you can better analyze the price chart along with market breadth. A.1. (1 Point) (Chart 4) Briefly analyze the chart of the S&P 500 with the NYSE advance-decline line. Does market breadth support/confirm the conclusion of the junior analyst that the S&P 500 is forming a significant broadening top? Answer: No. The NYSE 1-D line does not confirm the broadening top pattern. (1 Point) A.2. (10 Points) (Chart 4) Briefly analyze and explain why market breadth either confirms or does not confirm the potential broadening top pattern in the S&P 500. In your analysis and explanation, address the following: 1. The trend of the advance-decline line. (4 Points) 2. What are the higher highs showing? (3 Points) 3. What are the lower lows showing? (3 Points)

Answer: The overall conclusion is that based on the cumulative advance-decline line, market breadth remains strong and does not support the case for a top in the S&P 500. 1. Based on the advance-decline line market breadth is in a well-defined up trend. While the trend for the S&P 500 is still up, the price action over the last five months is sideways and with higher highs and lower lows (aka broadening formation), the pattern has become more erratic. With well-defined higher highs and higher lows, the trend for the advance-decline line is stronger than the trend for the S&P 500. Market breadth is still strong, which does not support the case for the broadening top in the S&P 500. In fact, market breadth supports the case for the continuation of the uptrend in the S&P 500. (4 Points) 2. Significant tops tend to occur with a negative divergence in the advance-decline line. This is when the advance-decline does not move to new recovery highs along with the market averages. That is not the case here. The advance-decline line is confirming the higher highs in the S&P 500 and does not support the case for a broadening top. (3 Points) 3. The advance-decline line appears to be forming a higher low relative to the lower lows in the potential broadening top pattern for the S&P 500. This suggests that even as the market moved to a new near-term low, market breadth was strengthening. This is a potential positive divergence that does not support for a topping process in the S&P 500. (3 Points)

Question 3, Part B (10 Points) (Chart 5) Analysis of new 52-week highs and new 52-week lows Use Chart 5: The S&P 500 with the10 day moving average of NYSE new 52-week highs minus NYSE new 52-week lows. B.1. (1 Point) You are a position trader at a hedge fund. Using the chart of the S&P 500 with the 10-day moving average of NYSE new 52-week highs minus new 52-week lows (Chart 5), would you look to buy or sell the S&P 500? Answer: Buy (1 Point) B.2. (9 points) Briefly analyze and explain your answer to Question 3: Part B.1 with an analysis of the S&P 500 and the new highs vs. new lows indicator. In your answer analyze and explain: 1. What is the new highs vs. new lows indicating? (1 Points) 2. What is level and trend of the new highs vs. new lows indicator in relation to the trend of the S&P 500 from November/December 2023 to March/April 2025. (4 Points) 3. Since late 2023, has the new highs vs. new lows indicated anything noteworthy Answer: The general conclusion is that the 10-day moving average of NYSE new 52-week highs minus NYSE new 52week lows is at or near oversold levels associated with past bottoms for the S&P 500 in August 2024 and December 2023. Each pullback in this indicator to the zero line or below has been associated with a pullback toward the rising 200-day moving average, which is a support for the S&P 500 and while above the rising 200-

day moving average the trend for the S&P 500 remains up with pullbacks within that trend potential buying opportunities. 1. Oversold or near oversold. (1 Point) 2. The new highs vs. new lows indicator is at or near oversold levels or the most oversold since August 2024 and December 2023. Readings toward or below zero on new highs - new lows have indicated an oversold level for the market. Moves toward the zero line or below have been associated with pullbacks to or tests of the rising 200-dma, which has proven to be a key support on the last two market corrections and this trend has not changed. Pullbacks within this trend are potential buying opportunities for the S&P 500. (4 Points) 3. The new highs vs. new lows indicator has higher lows in place since late 2023 or an uptrend since late 2023. This is confirming the uptrend for the US equity market. An uptrend for new highs - new lows is confirming the uptrend for the market. In other words, on each of the last three pullbacks, the new highs have been higher relative to new lows using a 10-day moving average. In terms of market breadth, this suggests breadth is strengthening on each correction. (4 Points) Question 3, Part C (14 Points) (Chart 6) Analysis of short-term breadth and volume indicators Use Chart 6: S&P 500 Index with the 10-day moving average of NYSE advances vs. NYSE declines and the 10-day moving average of NYSE up volume vs. NYSE down volume. You are a short-term trader examining the technical pattern for the S&P 500 using the 10-day moving average of NYSE advancing issues vs. NYSE declining (breadth indicator) and a 10-day moving average of NYSE up volume vs. NYSE down volume (volume indicator). C.1. (1 Point) (Chart 6) The S&P 500 has corrected sharply from the fall 2054 highs. Moving into February 2055 and using the breadth indicator (10-day moving average of advancing issues vs. declining issues), as a short-term trader would you look to BUY or SELL the S&P 500 in February 2055? Answer: Confirms (1 Point) C.2. (8 Points) Using the market breadth indicator, briefly analyze and explain your answer from Question 3: Part 3A. In your analysis and explanation address the following: 1. Divergence/confirmation. (4 Points) 2. Overbought/oversold levels. (4 Points) Answer: 1. On each successive correction low in the S&P 500 from December through January, the breadth indicator has recorded higher lows. This is a strong positive divergence for the breadth indicator. Breadth indicator did not confirm new price lows in early and late January. Indicates that on a shortterm basis, market breadth is improving or strengthening as the market moved to new pullback lows. Market internals are strengthening as the S&P 500 moves lower and this is a potential positive that supports the case for a market rally. (4 Points)

2. Readings into the 0.60 to 0.50 area tend to be oversold readings for the 10-day moving average of advances vs. declines. The recent move into this area suggests that decliners have become too high relative to advancers using the 10-day moving average of advances vs. declines and as such, this points to a short-term oversold condition. (4 Points) C.3. (1 Point) (Chart 6) Using the 10-day moving average of up volume vs. down volume (volume indicator), does the volume indicator confirm or diverge from your analysis of the breadth indicator? Answer: Confirms (1 Point) C.4. (4 points) Is the divergence/confirmation signal for the volume indicator as strong as that seen in the breadth indicator? Explain. Answer: The volume indicator has a positive divergence similar to the breadth indicator and this is a sign of underlying strength for up vs. down volume and a positive for the US equity market. However, the positive divergence for the volume indicator is weaker. The positive divergence for the volume indicator only occurs off two lows in January 2055, while the positive divergence for the breadth indicator occurs off three lows in December 2054 through January 2055. (4 Points)

QUESTION 4: Parts A and B CHARTS WITH OSCILLATOR (30 Points) Charts 7 & 8
Question 4, Part A (15 Points) (Chart 7) This question refers to the Dow Transports/Dow Industrials ratio line chart. A.1. (3 Points) (Chart 7) Why is the stochastic indicator declining while the MACD is rising? A.2. (2 Points) (Chart 7) What is anticipated when these two indicators diverge? A.3. (2 Point) (Chart 7) What is the volatility expectation for the ratio? A.4. (5 Points) (Chart 7) Provide a pair trade recommendation. Support your analysis using all of the technical information available on the chart.

A.5. (3 Points) (Chart 7) Briefly discuss the intermarket implications of ratio line and whether the chart represents a positive or negative picture for the economy. Question 4, Part B (15 Points) (Chart 8) This question refers to the T-ED Spread chart. B.1. (2 Points) (Chart 8) What do the components of the T-ED spread measure? B.2. (3 Points) (Chart 8) In the box labeled A, why is the stochastic indicator giving multiple bad sell signals? What can be done to improve the signals? B.3. (6 points) (Chart 8) Provide a spread trade recommendation. Support your analysis using all of the indicators on the chart and give a short term price target. B.4. (1 Points) (Chart 8) What does your analysis of the spread imply about equities and other risk correlated assets? B.5. (3 Points) (Chart 8) How can the spread be used to time hedging trades for your risk positions? Provide a hedging example. Answer: 4A: 1. The stochastic indicator is a shorter term indicator more suited for a range bound market. It measures where price is within a range with a slight moving average lag. It is declining because price is off the high of the range. MACD is a longer term focused trending indicator, measuring the difference between two moving averages. It is rising on the chart because the ratio is rising, leading to an expansion in the moving averages in the indicator formula. (3 Points) 2. Stochastics is a short term indicator and it is signaling a counter trend move to the MACD. It is calling for a small, short term pullback in the ratio. With the longer term trend still being up, higher "prices" are anticipated. (2 Points) 3. The Bollinger bands are expanding, indicating an increase in volatility. (2 Points) of which 1 Point is for recognizing Bollinger bands as a volatility measure, and another 1 Point is for recognizing they are expanding. 4. Recommendation: Buy the Transports; sell (short) the Industrials. This is a pure relative strength trade and not a correlation convergence type trade. (1 Point).

Technical observations (1 Point each): a) Price in an uptrend, making higher highs, higher lows. b) Moving average points up. c) Stochatics points down, but this is a short term play in an uptrend. d) MACD holding its uptrend. 5. Bullish for the economy. Transports are cyclical and leadership shows economic expansion. Leadership can indicate weaker oil prices, which is less of a strain on producers and consumers. (3 Points) 4B: 1. This is a quality spread, measuring demand for high quality T-Bills vs. demand for risky Eurodollars. (2 Points) 2. The stochastics indicator is giving bad sell signals because the spread is in a strong uptrend which keeps the momentum indicators overbought for an extended period. The signals from the stochastic can be improved upon by waiting for confirmation from the MACD indicator. (3 Points) 3. Buy T-Bills, sell Eurodollars. (1 Point) Technical observations (1 Point each) a) Price has been in a sideways channel and has recently turned up. b) The stochastic is positive and just near overbought territory. c) The MACD has just turned positive. d) The Bollinger bands have been providing support and resistance. e) Immediate short term target is the upper band at 0.17 4. The rising spread is a negative indication for risk assets. (1 Point) 5. When the spread is in an uptrend, put hedges on, remove when spread turns down. (2 Points) Example of a hedge would be anything that offsets losses to risk assets. (1 Point) Examples: Short risk trade, long the T-Ed spread, buy put protection, sell volatility for partial hedge, etc.

QUESTION 5 ELLIOTT WAVE (15 Points) Chart 9

On the attached chart (TTM) swing highs and lows have been labeled. Not all points are Elliott Wave points. Because this is a weekly chart, all wave details may not be apparent so some wave labels may need to be made based on other measures for wave identification. Using the prices on the chart: A. (8 Points)

Identify the primary degree waves from the low at 3.05 to the end of the chart and explain your reasoning for your labels including any Fibonacci calculations used.

Answer: A. Identify the primary degree waves from the low at 3.05 to the end of the chart and explain your reasoning for your labels including any Fibonacci calculations used. (8 Points) W(1) 3.05-11.00, w1 of the five sub-waves is not clear on the weekly chart. (1 Point) W(2) 11.00-7.37, a-b-c three wave pattern retracing between .382 and .5 of W(1) and into the area of the end of the w4 of lesser degree. (1 Point) W(3) 7.37-20.84, W(3) divides into five waves with w1 the shortest and w5 the longest, W(3) slightly exceeded 1.618 times the length of W(1). (1 Point) W(4) 20.84-15.25, simple a-b-c, retraced into the area of the previous w4 of lesser degree, length slightly exceeded a .382 retracement of W(3) and is equal in length to .618 times the length of W(2). (1 Point) W(5) 15.25-37-65, W(5) is extended and w5 of W(5) is extended. (1 Point) W(A) 37.65-23.35, simple 3-3-5, a-b-c down. (1 Point) W(B) 23.35-29.06, simple 3-3-5, a-b-c up, retracing .382 of W(A). (1 Point) W(C) 29.06- ?, incomplete five wave pattern, currently in w5 of W(C). 1

B. (1 Points) Identify the type of corrective pattern following the high at 37.65 by describing its wave structure.

Answer: Simple zig-zag correction (1 Point)

C. (6 Points) What do you see as the next trading opportunity on this chart? Describe your analysis. Include Fibonacci relationships that support your analysis. Answer:

The next trading opportunity would be a long position taken at the end of W(C). (2 Points) A target range between 16.27-14.76 for the likely end of W(C) is based on the following relationships: A 0.618 retracement of the move up from 3.05 to the high at 37.65 is 16.27. (1 Point) The level of the previous W(4) is 15.25. (1 Point)

Length of W(C) equals W(A) at 14.76. (1 Point) Within W(C), the length of w5 equals the distance from the beginning of W(C) to the end of w3 of W(C) at 16.02. (1 Point)

QUESTION 6 DOW THEORY CONFIRMATION (15 Points) Charts 10, 11, 12, & 13
A. (3 Points) (Chart 10 & 11) Explain if the DJIA movement in the 2nd half of 2007was confirmed by other indices and by volume? Answer: 1. The DJIA movement was not confirmed by DJTA and Russell 2000 because DJTA and Russell 2000 did not confirm the higher high in DJIA. (1 Point) 2. It was confirmed by volume. The trend was turning bearish; a Head-and-Shoulders pattern was formed in this period, with its completion at the end of year, volume increased with price breaking the neckline. (2 Points) It was also confirmed by volume. The trend was turning bearish; a Head-and-Shoulders pattern was formed in this period, with its completion at the end of year, volume increased with price breaking the neckline. (2 Points) B. (8 Points) (Chart 10 & 11) Explain, using confirmation from various technical indices and indicators provided on the chart, why the DJIA decrease starting September 2008 was sustainable and why March 2009 was a major bottom? Answer: 1. First of all, the DJIA trend was confirmed by DJTA and Russell 2000, all major indexes dropped heavily beginning September 2008 and began to rally starting March 2009. (1 Points) 2. Price failed to break out EMA line at the beginning of September 2008 and crossed under the Bollinger Band later the month. It crossed over the Bollinger Band in March 2009 then over EMA line two months later. (2 Points) 3. Starting September 2008, volume had always been higher with decreased price than with increased price until March 2009 when bullish volume exceeded bearish volume for the first time in past years. (1 Points) 4. RSI reached oversold level in September 2008 but failed to break out its trendline, whereas in March 2009 the RSI reached oversold again and crossed over the trendline at the same time. (2 Points) 5. In September 2008 MACD was well below zero when failing to cross over signal line, and the histogram showed that difference was significant for months, reflecting the dominating bearish mood in market. In March 2009 the MACD crossed over signal line and kept going up faster than signal line. (1 Points)

6. Slow stochastics barely reached oversold level in September 2008 and had been between 20 and 50 for a long time thereafter, which meant the price decrease had not reached to the end. Then with the %K crossing over %D at oversold level in March 2009, the bull trend had become apparent. (1 Points)

C. (4 Points) (Chart 12 & 13)

Compare the chart of the Dow Jones Industrial Average and the Dow Jones Transportation Average March 2009 low with the July 2011 low. What are these charts telling you? Use all available information provided to you on the chart.

Keep your answers brief. Answers should include analysis of all the technical indicators and Price/volume data provided on the charts. Answer: There are differences when you look at the two charts. While they agree and confirm on the direction there are differences in the volume which should be noted as well as differences in the MA crossovers. Looking at todays volume in the INDU it is less than the volume seen in 2009 while the TRAN volume is at the same levels for bother periods of time. Also the cross over time difference should be noted. The MACD did confirm for both averages. Yes, these charts show confirmation but with differences that should be noted. (4 Points) Price & Volume: Both DJIA and DJTA dropped rapidly with huge volume after forming a double-top in July 2011, so it looked very bearish. RSI: RSI on both indices were decreasing but had not reached oversold levels; this is an indicator to watch closely in the near future. MA 50 & MA 200: The 200 day MA for both DJIA and DJTA were decreasing, however; the 200 day MA on the weekly chart is a long term perspective (almost five years) which included the 2008 collapse and was one of the key reasons of the descending trend. The 50 day MA (covering about a one-year period) began to increase in the third quarter of 2009 for both and crossed over the 200 day MA in Q1 of 2011 and Q4 of 2010, respectively. The medium term still looked bullish, however; one should always remember that moving averages are a lagging signal and cannot be used as a trading tool by itself. The price is testing the 200 day MA support offering another signal to watch. MACD: Both had a failed crossover to the signal line then crossed under zero in July. This was a bearish sign. In summary, the trend seemed to be turning bearish in both the short to medium term as technical signals on both DJIA and DJTA confirmed with each other. Three technical signals to watch are: a price breakout from the 200 day support area, an oversold RSI, and a downturn of the 50 day MA. (4 Points)

QUESTION 7 CANDLESTICK ANALYSIS (40 Points) Charts 14, 15, 16, 17, & 18

Editors Note: There are a variety of components and exhibits to this question as outlined below. Be sure you are referring to the correct charts before you begin your analysis. Charts Provided: 1. Exhibit 7.1 of General Electric (GE) (Chart 14) 2. Exhibit 7.2 of the 10-Year US Treasury Yield Index (TNX) (Chart 15) 3. Exhibit 7.3 of the CBOE Jumbo Volatility Index (VIX) (Chart 16) 4. Exhibit 7.4 of a popular Gold ETF (GLD) (Chart 17) 5. Exhibit 7.5 of a popular Brazilian ETF (EWZ) (Chart 18) You are interviewing for a position as a key contributor to a leading technical newsletter that has a worldwide distribution network of predominantly retail clients. The job description requires the ability to provide clear and concise commentary of technical conditions and trade set-ups of a variety of financial instruments. During the interview, you are asked to show your expertise in candlestick analysis. You are given a series of candlestick charts coupled with a variety of momentum and moving average based indicators. Use only the provided information in the charts in your analysis. A. (6 Points) (Chart 14) Examine the circled portion on the chart (GE). Name the candlestick pattern that has formed over the two-day period. Is this pattern bullish or bearish? Does the provided RSI indicator support or contradict what the pattern is suggesting? Has the candlestick pattern been confirmed? If so, provide evidence from the chart. If not, explain your rationale. Answer: Dark Cloud Cover. Bearish Reversal Pattern. RSI confirms this short-term analysis, since it has just come off of a high on the indicator, and the RSI lines are now trending down. The recent price action breaking both the 20 and 50 day SMAs has confirmed the validity of the pattern. (6 Points) B. (6 Points) (Chart 15) Over the most recent 3 days, what candlestick pattern formed (TNX)? Does this pattern suggest a continuation or reversal in trend? Does the provided stochastic indicator provide support to what this pattern is suggesting? What is your short-term outlook for intermediate-term Treasury bond prices based on your analysis of this index? Answer: Evening Doji Star (in order for it to be an abandoned baby pattern, the doji must be completely outside of the range of the first and third days). Reversal. Stochastics confirms this signal as the line is coming off of a high (near 70) and now trending down. Since this chart is about bond yields, and it is suggestive of a bearish yield reversal, intermediate bond prices should rise. (6 Points) C. (6 Points) (Chart 16) In the past 2 days, what candlestick pattern formed? How do the provided technical indicators fit into your analysis? Based on the provided information and indicators in the chart what is your short-term outlook for the VIX?

Answer: Harami. This is a bearish pattern, and shows signs of a pending reversal. The provided Williams %R indicators scale is inverted from RSI and Stochastic indicators. Therefore, the indicator confirms the potential for a short-term bearish move. The Bollinger Bands also show an increase in volatility and an upside breakout of the bands (extreme) could increase the possibility of a reversion to the mean. Thus based on the evidence provided in the chart, it is more likely that the price will fall at least to the 20 day SMA (the median point of the bands). (6 Points) D. (6 Points) (Chart 17) What is the most recent candlestick pattern that has formed (GLD)? Is this pattern suggestive of a continuation or a reversal in trend? How do the provided indicators factor into your analysis? Answer: Bearish Engulfing. This is a short-term bearish pattern. However, price has not yet confirmed a breaking of the 20 day EMA to the downside. Volume has been trending down in the last weeks price uptrend, and has just increased on the most recent bearish candle. The Stochastic indicator has peaked above 80, and is now reversing. So, a short term downtrend is most probable from the evidence provided, and would be confirmed if the 20 EMA is broken. It appears there is recent support at the 130 price area. (6 Points) E. (6 Points) (Chart 18) Six months ago, the technical newsletter you are interviewing for published a bullish outlook on EWZ. Name and discuss the most recent candlestick formation in light of the other indicators present on the chart. What is your recommendation to a client who followed the bullish recommendation of the newsletter six months ago? Answer: A dragonfly doji has just formed on the 200-day SMA, signifying possible support at $63.69. The candle appears after a 1-month downtrend, suggesting the possibility of a bullish reversal. However, ADX is continuing to show an increase in the strength of the current downtrend. The ATR suggests that sell stops be placed greater than $2.21 away from current price for protection. (6 Points)

F. (4 Points) Yesterday evening, the technical newsletter published the following statement: The Brent crude oil index has been climbing for the better part of the past 4 weeks. After todays volatility in the energy sector, a hanging man pattern has now appeared on the daily chart for Brent crude. In addition, recently the index has been struggling to stay above its 10-day moving average. You are given todays chart, showing the market close. You notice that the oil index opened exactly where it closed last night, and also that tonights close was higher than the day before. The interviewing team is interested in what you would write in tonights edition of the technical newsletter. Comment on how the pattern should be taken into consideration given todays price action. According to your reading of Nisons text, what is the general principal that increases the importance of a signal from the hanging man pattern? Answer: The answer should be Seperating Line which is bullish. It could be a belt hold patter n. The action seen following the hangman candlestick negated the bearish implications of that candlestick. (4 Points)

G. (3 Points) A copper producing company is trying to determine if it should hedge against additional declines in the copper market. For the past 6-weeks copper prices have not only been volatile, but also trending down. Todays close shows that the price of copper gapped down. On a candlestick chart, what would this be called? According to Nison, how would traditional Japanese technicians interpret this event? Answer: "Low-price gapping play" is the correct answer. This is certainly not bullish. (3 Points) H. (3 Points) The newsletter interviewing team is trying to determine your ability to translate back and forth between Western patterns its readers are more familiar with, and also the correct Japanese Candlestick equivalent. According to your assigned readings in Nisons text, what are the candlestick equivalents of the following Western Patterns? Head and Shoulders Bottom Triple Top Rounded Bottom Answer: (1) Inverted 3 Buddha (Top) OR Modified Three River Pattern (2) Three Mountain Tops, (3) Frying Pan Bottom (3 Points)

QUESTION 8 SENTIMENT (15 Points) Charts 19, 20, & 21

You are working as a technician 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 19) Analyze chart 19. What does the current reading of consumer confidence mean? What does this type of reading typically mean for future stock returns? Answer: The chart shows that consumers are extremely optimistic about the future. (1 Points) Extreme levels of consumer optimism have historically been bearish for stocks. (2 Points) B. (3 Points) (Chart 20) Analyze chart 20. 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? Answer:

The current reading shows that ~65% of newsletter writers, surveyed by Investors Intelligence are bullish. (1 Point) Historical stock returns are low once this survey reaches an optimistic extreme and reverses as it has in chart 8B. (2 Points) C. (3 Points) (Chart 21) Analyze chart 21. What does the VIX measure? What does the current reading suggest about future stock returns? Answer: The VIX measures the volatility implied by options traders in their pricing of S&P 500 options in the market place. (1 Point) VIX reached a low and reversed several months ago. Volatility is rising but is still far below levels seen in past sharp declines. Based on history, VIX could move higher leading to further declines. (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 decrease equity exposure. (2 Points) All three sentiment indicators were showing extreme levels of optimism. 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 decrease equity exposure. (4 Points)

QUESTION 9: Part A and Part B BEHAVIORAL FINANCE (10 Points) Chart 22

A. (5 points) (Chart 22) Does the information in chart 22 support or discredit the efficient market theory? Why? 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." 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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Antarctic Equity Market Index Daily Point & Figure (h/l) 0.3 x 1

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Antarctic Broad Commodity Index 0.80 points per box: 1 box reversal

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