CMT Level 1 Questions & Answers

What are the basic tenets of Dow Theory -ANSWER 1.) The averages discount everything 2.) The market has three trends 3.) Major trends have three phases 4.) The averages must confirme each other 5.) Volume must confirm trend 6.) A trend is in effect until it gives definitive signals that it has reversed Technical Analysis by Kirkpatrick -ANSWER The study of prices in freely traded markets with the intent of making profitable trading or investment decisions. -Kirkpatrick Basic Assumptions of Technical Analysis by Edwards & Magee -ANSWER -Stock prices are determined solely by the interaction of demand and supply -Stock prices tend to move in trends -Shifts in demand and supply cause reversals in trends -Shifts in demand and supply can be detected in charts -Chart patterns tend to repeat themselves Technical Analysts believe... -ANSWER -"the market is always correct" -that all factors (Fundamental) are already factored into the demand and supply curves and, thus, the price of the company's stock. The Art of Technical Analysis by Pring -ANSWER -is to identify trend changes at an early stage and to maintain an investment position until the weight of the evidence indicates that the trend has reversed, (Pring, 2002) What is Technical Analysis used for? -ANSWER -to determine the trend, when it is changing, when it has changed, when to enter a position, when to exit a position, and the analysis is wrong and the position mus be closed. -Kirkpatrick Trend -ANSWER - a directional movement of prices that remains in effect long enough to be identified and still playable - A trend must be recognized early and be long enough for the technician to profit. -Kirpatrick How are trends identified? -ANSWER -Linear Least-Square regression -Moving Averages -Trend lines Accumulation -ANSWER A time when buyers emerge purchasing securities, generally from distressed sellers. It can be seen as a period when equities are absorbed by expanding demand over a period of time resulting in a possible favorable effect on price or a period of price equilibrium following a decline. This can be viewed as the first phase of a bull trend, or perhaps even the beginning of a bull market. Advance-Decline Line -ANSWER Number of stocks advancing divided by the number of stocks declining over a particular time period. Apex -ANSWER A peak or a point of intersection of two trendlines; the usual connotation that some new trend may evolve as prices approach that intersection. Arbitrage -ANSWER Simultaneous buying in one market and selling in another market in order to take advantage of differences in price. As it relates to stock could be the purchase of the aquiree and the sale of the acquirer. In futures could relate to buying one futures contract and selling a like contract to capture price inefficiencies. Back and Fill -ANSWER Same as Consolidation. See also Stabilization. Trading back and forth in a narrow range. Bar Chart -ANSWER Price/time chart that depicts high, low and close data as bars on the vertical axis and time intervals on the horizontal axis. Volume is usually indicated also, as vertical bars on the bottom of the chart under the applicable price data. Base -ANSWER Period of accumulation (see above), also called "Bottom." Can also be described as price level where buyers continue to buy supporting the market. Bear Market -ANSWER A long period of time, often a year or more, when the general trend of securities prices is down. Bear Trap -ANSWER A false move to the downside that does not initiate a new downtrend, but is actually the final reaction prior to a sustained advance, hence "trapping the bears." Block -ANSWER A single transaction of large number of shares. The NYSE defines transactions of 10,000 shares or more as blocks. Blow Off -ANSWER The final phase of an uptrend, ending a mark up phase, when prices rise very rapidly usually on high volume, leading to a sharp reaction. See "Climax." Breadth -ANSWER Net number of stocks advancing versus declining. When advances exceed declines, breadth is positive; when the reverse is true, breadth is negative. Breakdown -ANSWER Like "Breakout," but used to refer to the downside. Breakout -ANSWER When stock's price or volume exceeds previously recorded high or low (or resistance or support level) or some other predetermined criteria. Also called "Penetration." Bull Market -ANSWER A long period of time, usually a year or more, when the general trend of securities prices is up. Bull Trap -ANSWER A false move to the upside that does not initiate a new uptrend, but is actually the final rally before a sustained decline, hence "trapping the bulls." A bull trap can be described as a strong rally in the context of a "Bear Market" which traps buyers into believing that the market is turning to the upside. Churning -ANSWER Hesitation in a trend, usually leading to a reaction. Volume is normally relatively high (after an advance), with limited price progress. Climax -ANSWER (Climatic lowpoint or climatic highpoint). A sudden end to a trend, accompanied by high volatility and high relative volume. Concession or Spread -ANSWER Price differential between trades when blocks of stock are involved. Confirmations -ANSWER Two or more trends or momentum measures extending their trends to new highs (or lows) at the same time. The implication is confidence that the trend will continue. Often said of the Dow Jones Industrial Average versus the Dow Jones Transportation Average. Consolidation -ANSWER A pause in trend with the expectation the trend will be resumed in the same direction. Usually considerably shorter in time than Stabilization. Continuation Pattern -ANSWER Continuation Pattern: Consolidation phase that temporarily interrupts an up or down move and sets the stage for another move in the same direction later on, usually of short duration. Correction -ANSWER A movement in the opposite direction of a trend that will not break or reverse that trend. Usually longer in time than a reflex rally or reflex reaction. Discount -ANSWER The amount by which the price of an option or future falls below the theoretical value, representing the degree or pessimism of market participants. Distribution -ANSWER Process in which demand for a stock is overcome by an expanding supply, which over a period of time has an unfavorable effect on the price of a stock. It is generally a period of trend neutrality in price, but often has high volatility. Divergence -ANSWER One measure failing to extend its trend to a new high (or low) while another measure does. This leads to less confidence in continuing the trend. Often said of the Dow Jones Industrial Average versus the Dow Jones Transportation Average. Opposite of confirmation. Downtick -ANSWER A transaction that occurs at a lower price than the previous transation. Extended -ANSWER When a stock has advanced or declined to, or in excess of, its trend parameters and a consolidation is anticipated. Failsafe Point -ANSWER See "Stop Point." The price level which, if exceeded (on the downside in a long position; on the upside in a short position), breaks the trend or negates a reversal pattern. The point is usually below a support level or just above a resistance level. Sometimes called "Failsafe Point" or "Protection Point." Financial Futures -ANSWER Futures contracts based on financial instruments such as U. S. Treasury Bonds, Fed Funds, and other interest rate-sensitive issues, currencies and stock market indices. Futures Contract -ANSWER Exchange-traded contracts that give the holder the obligation to buy or receive a certain amount of a product at a specific prices on a specific date. Futures are used by business as a hedge against unfavorable price changes and by speculators who hope to profit from such changes. Gap -ANSWER When stock's high and low prices on a given day do not overlap the stock's high and low of the previous day. In other words, when instrument trades above the previous day's high or trades below the previous day's low and remains in that direction. When a gap initiates a trend, it is called a breakaway gap; an exhaustion gap ends or reverses a trend, and measuring gaps usually duplicate the most recent move before the gap.