CMT Level 1 Practice Quiz Answers

This is a follow-up post and answers to the initial Level 1 Practice Quiz. The answers given for that quiz are as follows:

 

 

Answer Key:

 

1.) d.)
2.) c.)
3.) d.)
4.) a.)
5.) c.)
6.) a.)
7.) b.)
8.) b.)
9.) d.)
10.) a.)
11.) d.)
12.) c.)
13.) b.)
14.) b.)
15.) c.)
16.) a.)
17.) b.)
18.) d.)
19.) a.)
20.) c.)
21.) c.)
22.) d.)
23.) c.)
24.) b.)
25.) a.)

 

Listed below are the books and editions cited in this answer guide:

 

Technical Analysis of Stock Trends (9th Edition) – Edwards, Magee
Technical Analysis: The Complete Resource for Financial Market Technicians – Dahlquist, Kirkpatrick
Technical Analysis Explained (4th Edition) – Pring

 

1. d.) All of the above

 

There are many influences on market prices. As Bassetti writes in the preface, there is “a galaxy of influences.” Other influences include but are not limited to: desire, broker need for income, cunning, gullibility, deception, manipulation, malice, professional money managers’ need for performance, “trap setting,” malice, job security, naiveté, supply and demand, liquidity players, self-destructiveness, passivity, conspiracy, fraud, and the ego.
It is important to remember that “price discounts everything,” and that all possible influences on price have been taken into account and result in the current market price of any given entity. See Edwards, Magee p. ix

 

2. c.) If advancing, a stock will likely meet resistance at a round number, especially if it is also an all-time high

 

Round numbers generally provide opportunities for the alert investor because they can be areas of support or resistance. When the stock price attains new high or low territory, the tendency for round numbers to act as support (in a downtrend) or resistance (in an uptrend) increases. Edwards and Magee state this is a natural reaction of investors when setting goals to buy (or sell) stock, because it is more likely that investors will pick a round number than any other non-round, random number. See Edwards, Magee p.245-247

 

3. d.) The last 15 minutes the market is open

 

Historically, the greatest upward bias in prices exists 15 minutes before the close. Answers a.) and b.) reflect the times with the greatest average downward price bias according to Pring. See Pring p.389-90

 

4. a.) A diamond top

 

A diamond top is formed when a broadening formation leads into a symmetrical triangle, giving the appearance of diamond if drawn by boundary lines. See Edwards, Maggee p.160-67

 

5. c.) Pennants

 

Pennants are more commonly seen as continuation patterns, whereas the other patterns all carry major reversal implications. See Edwards, Magee p.151, p.190-95

 

6. a.) The Arms Index

 

The Arms Index measures relative volume in advancing vs. declining stocks. An index reading greater than 1 is bearish. The advance/decline line measures advancing or decline issues without regard to their volume. The Chaiken Oscillator measures movements of accumulation or distribution that focus on advancing or declining volume for one specific stock. The Relative Strength Index measures a stocks’ performance with it’s historical average, and tells how strong the stock is currently in regards to its averages. See Dahlquist, Kirkpatrick p.143-45, 151

 

7. b.) $13, $14

 

We know that candle A closes higher than it opens because it is white. The candle’s real body marks the open and the close, which are at $13 and $14, respectively. The long shadow or “wick” that extends below the candle signifies the remaining range that the price traded in for that candle. For information on reading candlestick charts see Dahlquist, Kirkpatrick p.203-05, and Pring p.257-59

 

8. b.) I and II

 

The high low logic index is composed of the lesser of the number weekly new highs to total issues or the number of weekly new lows to total issues. A low number indicates that a low number of new highs OR new lows have recently occurred, while a high number generally indicates a mixed market. A high reading is the result of both new highs and new lows occurring. It is also a bearish sign and indicates high volatility, while a low reading signifies low volatility and is generally bullish. This indicator is smoothed over with a 10-week moving average. See Dahlquist, Kirkpatrick p.148

 

9. d.) a centered moving average

 

Centered moving averages are adjusted for time by shifting the average to the left by a specified number of days. Center moving averages can be any type of average that is centered, for example a centered simple moving average. Envelopes are the result of two averages plotted above and below the price, thus “enveloping” the price. Exponential moving averages emphasize the more recent prices most, while a simple moving average weights all days equally. For more on CMA’s see Dahlquist, Kirkpatrick p.468-69

 

10. a.) A rally after a downside breakout

 

A pullback is the term for a rally after a downside breakout. Many pullbacks occur after breaking out of patterns. They resulting price pullback often returns to the price level from which they originally broke out, before continuing downwards as one would expect after a downside break out. A pullback is the opposite of “c.) A reaction after an upside breakout,” which is termed a “throwback.” See Edwards, Magee p.132

 

11. d.) Compare different markets to see which is performing most favorably

 

Ratio analysis compares the relative strength of various markets. The purpose of ratio analysis is to see which market is most attractive for investment purposes. See Dahlquist, Kirkpatrick p.515

 

12. c.) A descending triangle

 

A down-sloping top line with a “practically horizontal” bottom boundary characterizes a descending triangle. Of the right-angle triangle variety, Edwards and Magee state that these descending triangles have a tendency break out to the downside. See Edwards, Magee p.115-19

 

13. b.) The general market, sectors, then individual companies

 

Top-down analysis examines the markets from the most broad perspective to the most narrow to make investment decisions. Answer d.) Stocks, sectors, then the general market would represent bottom-up analysis, which is essentially the opposite. Bottom-up analysis examines individual companies first, then sectors, then the general market to make investment decisions. See Dahlquist, Kirkpatrick p.515-33

 

14. b.) Diminishing vigor

 

According to Edwards and Magee, diminishing vigor should mark any reaction that moves counter to the prevailing trend. This means that the volume and price movement should decrease as the reaction counter to the primary trend lengthens. One would not expect a countertrend to be marked with a.) increasing fervor. While both c.) volatility and d.) stability can be apt adjectives to describe a countertrend, neither would be expected as a normal nor expected element – they are in fact opposites. See Edwards, Magee p.169

 

15. c.) Rising wedges

 

Rising wedges are typically found in bear markets. Broadening formations are not generally specific to bear or bull markets but rather tops or bottoms. Rounding tops would be expected only at market tops. See Edwards, Magee 168-9

 

16. a.) A trendline connecting the price peaks of a security

 

A “blue line” is any line that connects two price peaks to form a trend line. It is useful to determine buying points by plotting the “blue parallel” at a price trough, forming a trend channel used for entry points. A “red line” is answer b.) “A trend line connecting the troughs of a security.” For explanations and diagrams of red and blue lines, see Edwards, Magee p.452-55

 

17. b.) Sentiment

 

Sentiment reflects the psychology or emotions of market participants. For a complete breakdown of market sentiment, including indicators, see Dahlquist, Kirkpatrick Ch. 7

 

18. d.) A shark pattern

 

The shark pattern is always a three-bar pattern with each bar’s range narrower than the previous. It is essentially two inside bar patterns consecutively. It is a very small triangle and the term shark comes from the fin-like shape. See Dahlquist, Kirkpatrick p.389-90

 

19. a.) The recognition of patterns where they do not exist.

 

Representation occurs due to the subjective nature of technical analysis. See Dahlquist, Kirkpatrick p.88-89

 

20. c.) The nature of trends to have the same characteristics regardless of the time the trend spans

 

The principle of the fractal nature of trends states that all patterns can be applied to any timeframe chart. You may find a pattern on a monthly chart that has the same implications as the same pattern on a 5-minute chart. The only difference in this case is the significance, as the longer chart pattern is more consequential. See Dahlquist, Kirkpatrick p.15-16

 

21. c.) Downside volume exceeds the cumulative total of upside and downside volume by 90% AND the percentage of downside points exceeds the cumulative total of all points gained or lost by 90%

 

NPDD’s are have many potential implications. They are bearish when occurring in isolation or when they occur within 30 days of each other. They are bullish when they are followed by a ninety-percent upside day or several strong upside days; this signals a major reversal. They can also be associated with a short-term correction if they occur after a market high or in reaction to negative news. See Dahlquist, Kirkpatrick p.145-46

 

22. d.) Andrew’s Pitchfork

 

This pattern is called Andrew’s Pitchfork after Dr. Alan Andrews. Andrew’s pitchfork is a variation of speedlines drawn on a chart in a downtrend. They offer some guidance as to the future price movement of a stock, as the lines are drawn “into the future.” The other three answers are fictional. For more on Andrew’s Pitchfork, including how to draw it, see Dahlquist, Kirkpatrick p. 243

 

23. c.) The Presidential Cycle

 

This cycle is alternatively known as the four-year cycle. The “Popular Cycle” is fictional while The Kondratieff Cycle typically lasts between 50 and 54 years. The Long Wave cycle is only another name for the Kondratieff Cycle, sometimes also called the K-Cycle. For more on cycles see Pring p.364-87

 

24. b.) A Chandelier exit

 

A Chandelier exit utilizes an arbitrary ATR multiple (usually between 2.5 and 4 times the ATR) to determine the distance a stop order should be placed below the price level of the new high. It is meant to account for intrinsic volatility. This is useful when there is no clear support for which placing an arbitrary stop order below it would be desirable. See Dahlquist, Kirkpatrick p.260

 

25. a.) The deletion of the earliest data from a moving average

 

The Drop-off Effect is the effect that occurs from removing the oldest data. This effect is most pronounced when the oldest data shows considerable change, yet the most recent data shows little change. See Dahlquist, Kirkpatrick p.280

 

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