CMT Level I · 3-Day Cram Guide

3-Day Cram Plan

If you only have 72 hours, fight smart. Cover everything, then practice retrieval, then triage weak spots.

Day 1 · Build the map

• Read every TL;DR on this page (~90 minutes).
• Take the 132-question placement exam once (2 hours).
• Note your three weakest sections from the results.
• Skim the deep dive of the top-weighted sections: Trend, Patterns, Indicators, and Comparative Market Analysis.

Day 2 · Repair weak spots

• Re-read the full deep dive plus every Q&A for your three weakest sections.
• Re-read the TL;DR for the remaining sections.
• Re-take the placement exam.
• Re-test only the sections you missed using the “Common questions” toggles on this page.

Day 3 · Lock it in

• Read every Q&A out loud, answering before opening the toggle.
• Memorize the numbers in the Final 24-hour Checklist (RSI 14, MACD 12/26/9, BBands 20/2, ADX 25, 68-95-99.7, and so on).
• Stop introducing new material at least 3 hours before sleep.
• Sleep at least 7 hours; arrive 30 minutes early with a valid photo ID.

Mindset rules

Level I rewards breadth, not depth. Most items test definitions, recognition, and one-step reasoning. When stuck, eliminate absolutist answers (“always,” “never,” “guarantees,” “automatically”) first — they are almost always wrong.

Pace math

132 questions in 120 minutes equals about 54 seconds per question. Plan four passes: (1) a fast pass answering every easy item; (2) work the medium items; (3) tackle the hard items; (4) review flagged items in the final ~10 minutes. Never leave a question blank — there is no guessing penalty.

0. Welcome to Level I — CMT Program, Charter & Ethics

~5% of the exam · The easiest points on the test if you actually read this section.

The 7 Standards of Professional Conduct

The CMT Association adopts the CFA Institute Standards. Memorize the top-level structure:

Ethics scenarios you will see

• Material nonpublic info: cannot trade or recommend on it; the mosaic theory (combining nonmaterial public + nonpublic data into a material conclusion) is allowed.
• Suitability (III-C): recommendations must fit the client’s objectives, constraints, and risk tolerance — not just be a “good idea.”
• Priority of transactions (VI-B): client trades come first, then employer, then personal.
• Soft dollars / gifts: must be disclosed; cannot impair independence.
• Performance presentation (III-D): fair, accurate, complete; show gross/net, time period, methodology.
• Misrepresentation (I-C): includes plagiarism — cite sources.

CMT Charter requirements (memorize)

1. Pass Level I, Level II, and Level III exams.
2. Become a Member of the CMT Association in good standing.
3. Three years (36 months) of qualifying professional experience in a role that applies technical analysis.
4. Provide professional references; sponsorship by existing Members.
5. Sign and abide by the CFA Institute Code of Ethics and Standards of Professional Conduct.
6. Maintain dues and membership in good standing.

Curriculum & exam logistics

• Three volumes of curriculum, one per level. Level I focuses on foundations.
• Exam is delivered at Prometric centers (or via approved online proctoring in many regions) on a multi-week window in Spring and Fall.
• Approved calculators: TI BA II Plus and HP 12C. Level I uses calculator sparingly.
• Photo ID required. No personal items in the testing room.
• Score reporting: pass/fail with topic-level performance bands (above / at / below band).

Common questions

I. Theory and History of Technical Analysis

~7% of exam · Heavy on Dow Theory, EMH debate, anomalies, and named historical figures.

The Three Assumptions in Detail

1. Price discounts everything: any information that could affect a stock is already reflected in its price. This frees the technician from chasing earnings, geopolitics, or supply chains directly — the price tape integrates them. The corollary: focus on price, because that is the market’s aggregate verdict.
2. Prices move in trends: a trend is more likely to continue than reverse. The technician’s job is to identify the trend, ride it, and detect when it reverses. This drives entry/exit philosophy and risk management.
3. History repeats: chart patterns reflect crowd psychology — greed, fear, hope, denial — which recur consistently. This is why pattern recognition (e.g., head & shoulders) has decades of empirical longevity.

Dow Theory — The Six Tenets

1. The Averages Discount Everything. Both the Industrial Average and the Rail (Transportation) Average reflect all known information.
2. The Market Has Three Trends.
   • Primary trend: lasts months to years; the “tide.”
   • Secondary trend: lasts weeks to months; corrections against the primary; typically retrace 33%–66% (often ~50%) of the prior primary leg.
   • Minor trend: lasts days to weeks; noise — the “ripples.”
3. Major Trends Have Three Phases.
   • Bull market: accumulation (informed buying near the lows) → public participation (sustained advance, broad media coverage) → distribution (informed selling to the late-arriving public).
   • Bear market: distribution → panic (sharp decline) → despondency (long grinding bottom with discouraged sellers).
4. The Averages Must Confirm. A new primary trend signal requires confirmation: both the Industrial and Transportation averages must move in the same direction. A non-confirmation is a warning, not a reversal.
5. Volume Must Confirm the Trend. Volume expands in the direction of the primary trend and contracts on counter-trend moves. Declining volume on advances is a red flag in a bull market.
6. A Trend is Assumed In Force Until Definitively Reversed. This is the Dow analogue of Newton’s first law: don’t pre-empt a reversal call. Wait for evidence (a failed swing, structural break, or non-confirmation).

EMH & the Random Walk

Documented Anomalies (used to argue against strict EMH)

• Momentum: past 3–12 month winners outperform losers over the next 3–12 months.
• Value: low price-to-book / low P/E stocks historically outperform high-multiple stocks (Fama-French).
• Size: small-cap stocks historically outperform large-cap, adjusted for risk (Banz, Fama-French).
• Low-volatility: low-vol stocks have outperformed high-vol stocks on a risk-adjusted basis.
• Post-earnings announcement drift (PEAD): stocks continue to drift in the direction of earnings surprises for weeks.
• Calendar effects: January effect (small-cap January outperformance), turn-of-the-month effect, “Sell in May.”
• Reversal at long horizons: 3–5 year prior losers tend to outperform prior winners (De Bondt & Thaler).

Historical Mileposts (names you should recognize)

• Charles H. Dow (1851–1902): co-founder Dow Jones & Company and WSJ; published the editorials that became Dow Theory.
• William Peter Hamilton: WSJ editor who systematized Dow’s editorials into a coherent theory (“The Stock Market Barometer,” 1922).
• Robert Rhea: codified Dow Theory in “The Dow Theory” (1932), formalizing the six tenets.
• Richard Schabacker (1930s): “Technical Analysis and Stock Market Profits” — first comprehensive pattern catalog.
• Edwards & Magee (1948): “Technical Analysis of Stock Trends” — the canonical pattern textbook still in print today.
• Ralph Nelson Elliott (1930s–40s): Elliott Wave Theory (5 impulse + 3 corrective wave structure).
• W. D. Gann (early 1900s): time/price geometry, the Gann angle (1×1 = 45°).
• Richard Wyckoff (early 1900s): accumulation/distribution method, the Composite Operator concept.
• J. M. Hurst (1970): cycle theory and the Hurst principles.
• Steve Nison (1990s): introduced Japanese candlesticks to Western audiences.
• John Bollinger (1980s): Bollinger Bands.
• J. Welles Wilder (1978): “New Concepts in Technical Trading Systems” — RSI, ADX, Parabolic SAR, ATR.
• Peter Steidlmayer (1980s): Market Profile.
• MTA founded 1973 → renamed CMT Association; later achieved regulatory recognition for technical analysis as a research discipline.

Common questions

II. Charts: Market Price Data

~10% of exam · Know every chart type, the difference between scales, all data intervals, and how volume + open interest behave.

Chart Types — What Each Encodes

Arithmetic vs Logarithmic Scaling

• Arithmetic (linear): equal vertical = equal dollar move. Useful for short timeframes and narrow ranges. A trendline drawn on an arithmetic chart implies equal dollar gains.
• Semi-log / logarithmic: equal vertical = equal percentage move. Required for long-term charts of high-growth assets. A trendline on a log chart implies equal percentage gains.
• Worked example: 10 → 20 is +100%; 100 → 200 is +100%. On an arithmetic chart, the second looks 10× bigger; on a log chart they look identical.
• Best practice: long-term charts (multi-year, multi-decade) — log. Intraday and short-term — arithmetic is fine.

Intervals: Time-Based vs Activity-Based

• Time-based: 1m, 5m, 15m, 30m, 60m, 4h, daily, weekly, monthly. Each bar represents the OHLC over that fixed clock window.
• Tick charts: a new bar after every N trades. Activity-driven; quiet periods produce fewer bars.
• Volume bars: a new bar after every N shares/contracts. Each bar represents equal participation, not equal time.
• Range bars: a new bar after each N-point price move. Each bar has equal price travel.
• P&F / Renko / Kagi: pure price-driven; time removed.
• Shorter intervals = more noise, more signals; longer intervals = more signal, slower response. Multiple time frames are recommended.

Volume & Open Interest

• Volume: number of shares (equities) or contracts (futures/options) traded in an interval. Reveals the participation behind a move.
• Open interest (OI): futures/options only. Number of contracts outstanding. A new buyer + new seller = OI rises by 1. Two existing holders offsetting = OI falls by 1.
• Key futures/options rules:
  • Price up + Volume up + OI up ⇒ strong bullish (new longs).
  • Price up + Volume down + OI down ⇒ weak rally (short covering).
  • Price down + Volume up + OI up ⇒ strong bearish (new shorts).
  • Price down + Volume down + OI down ⇒ weak decline (long liquidation).
• Volume divergence with price (price up, volume falling for many days) warns of fading participation.

Data quality & gotchas

• Split/dividend adjustment: equity charts should be adjusted for splits and dividends for accurate long-term analysis.
• Futures contract roll: continuous contracts must be back-adjusted to remove gaps at expiration roll; otherwise pattern analysis is distorted.
• Survivorship bias: historical equity universes that exclude delisted or merged companies inflate measured returns.
• Holidays, half-days, and time-zone shifts create gaps that are not informational.
• Tick vs trade vs quote data: granularity differences matter for high-frequency analysis.

Common questions

III. Trend Analysis

~13% of exam · The single highest-yield section. Master this first.

Trend Definitions & Classification

• Primary trend: months to years (Dow Theory tide).
• Intermediate / secondary trend: weeks to months; corrections within the primary; retrace 33–66% typically.
• Short-term / minor trend: days to weeks; noise on the primary trend.
• An uptrend requires both HH and HL. A pullback that does not undercut the prior HL keeps the uptrend intact.
• An uptrend is suspect when the last HL gets broken; it is broken when a LH and LL form (a new downtrend).

Support & Resistance — Strength Factors

• Number of touches: more touches = more visible level = more reactive.
• Time held: a level that has held for years is more meaningful than one that held for days.
• Volume at the level: high-volume touches anchor the level in memory.
• Age: older levels often have larger trapped audiences; their reactions can be stronger.
• Round numbers and psychological levels: $100, $50, integers in indexes (S&P 5000, DJIA 40,000) act as soft support/resistance.
• Prior all-time high / low: often a major battleground.
• Polarity principle: a broken support becomes resistance (sellers who bought at that level want to break even); a broken resistance becomes support.

Trendlines & Channels — Drawing Rules

• Up trendline: connect successive higher lows. Touch points should not pierce the line.
• Down trendline: connect successive lower highs.
• Two touches define, three touches confirm, break requires a decisive close beyond (not just intrabar) — ideally with rising volume.
• Steeper trendlines break more easily than shallow ones; very steep trendlines are typically unsustainable.
• Channel: draw a parallel line through the opposite swings. Price oscillates within the channel; touches of the upper line in an uptrend are profit-taking zones, lower line is buy-the-dip.
• Internal vs external trendlines: external use extreme highs/lows; internal pass through the body of price action.

Fibonacci Retracements & Extensions

• Retracements (within prior swing): 23.6%, 38.2%, 50%, 61.8%, 78.6%.
• Extensions (beyond the prior swing): 127.2%, 161.8%, 261.8%.
• The 61.8% (golden ratio) is the most-watched retracement; a hold there is bullish for the prior trend.
• A retracement deeper than 78.6% often signals a trend change.

Volume + Trend Rules

• In a healthy uptrend: volume expands on rallies, contracts on pullbacks.
• In a healthy downtrend: volume expands on declines, contracts on bounces.
• Divergence: price up + volume down for several days = warning.
• Climax volume on a single bar can mark the end of a move (selling/buying exhaustion).

Multiple Time Frames (MTF)

• Top-down approach: monthly → weekly → daily → intraday.
• Trade only in the direction of the higher time frame trend; use the lower time frame for execution.
• A signal aligned across at least two time frames is higher quality than a single-time-frame signal.

The Four Trades (Dow-style decision framework)

1. Buy in an established uptrend on a pullback to support / rising trendline / 38.2–61.8% retracement.
2. Add to longs on a continuation breakout above prior resistance with volume.
3. Sell or short when an uptrend reverses and a new downtrend is confirmed (LH + LL).
4. Add to shorts on a continuation breakdown below prior support with volume.

Stop Placement Conventions

• Structural stops: just beyond the most recent swing low (long) or swing high (short).
• Volatility stops: distance defined as N×ATR from entry, where N is typically 1.5–3.
• Trailing stops: ratchet stop up (long) as new HL form; Parabolic SAR or chandelier stops are common.
• Round-number caution: don’t place stops precisely at the round numbers everyone else uses; allow some buffer.

Common questions

IV. Chart Pattern Analysis

~16% of exam · The largest single section. Recognize every pattern, the volume signature, and how targets are measured.

Reversal Patterns — In Detail

Continuation Patterns — In Detail

Gap Taxonomy

Japanese Candlesticks — Essential Patterns

Single-candle

• Doji: open ≈ close. Indecision. Becomes meaningful at trend extremes. Variants: long-legged, gravestone (long upper shadow), dragonfly (long lower shadow).
• Hammer: small body at the top, long lower shadow (≥ 2× body). Bullish reversal at lows.
• Hanging Man: same shape as hammer, but at the top of an uptrend. Bearish.
• Shooting Star: small body at the bottom, long upper shadow. Bearish reversal at highs.
• Inverted Hammer: same shape as shooting star, but at the bottom of a downtrend. Bullish.
• Marubozu: no shadows; entire bar is body. Strong trending bar.
• Spinning top: small body, both shadows. Indecision.

Two-candle

• Bullish engulfing: down bar followed by an up bar whose real body fully engulfs the prior body. Bullish reversal at lows.
• Bearish engulfing: up bar followed by a down bar whose real body fully engulfs the prior body. Bearish reversal at highs.
• Harami (bullish/bearish): a small body fully contained within the prior large opposite-color body. Indecision / potential reversal.
• Piercing line (bullish): a down bar, then a strong up bar opening below the prior low and closing past the midpoint of the prior body.
• Dark cloud cover (bearish): an up bar, then a strong down bar opening above the prior high and closing past the midpoint of the prior body.
• Tweezer top / bottom: two candles with matching highs (top) or lows (bottom) at the trend extreme.

Three-candle

• Morning star: down bar → small-body indecision bar (often a doji) → strong up bar. Bullish reversal at lows.
• Evening star: up bar → small-body indecision bar → strong down bar. Bearish reversal at highs.
• Three white soldiers: three consecutive strong up bars with small wicks. Bullish continuation / reversal.
• Three black crows: three consecutive strong down bars. Bearish.
• Rising/falling three methods: continuation patterns — a strong directional bar, three small counter-trend bars contained inside the first bar’s range, then another strong directional bar.

Pattern reliability tips

• Bigger patterns project bigger moves. A 6-month base > a 3-week base.
• Patterns formed at strong support/resistance confluences are more reliable.
• Patterns confirmed by volume expansion on breakout are more reliable.
• Patterns that retest the breakout line (throwback) and hold the polarity flip are higher-quality entries.

Common questions

V. Technical Indicators

~14% of exam · Know every indicator’s formula intuition, default settings, signal logic, and how it can fail.

Moving Averages

• Simple Moving Average (SMA): arithmetic mean of N closes. SMA = (P1 + P2 + ... + Pn) / N. Equal weight to each period.
• Weighted Moving Average (WMA): linear weights favor recent data. Recent period weight = N, oldest weight = 1.
• Exponential Moving Average (EMA): weights decay exponentially. EMA_t = α · P_t + (1 − α) · EMA_{t-1} where α = 2 / (N + 1). Responds faster than SMA of the same length.
• Common lengths: 10, 20, 50, 100, 200 days.
• Golden cross: short MA (commonly 50-day) crosses above long MA (commonly 200-day). Bullish intermediate/long-term signal.
• Death cross: short MA crosses below long MA. Bearish.
• MAs act as dynamic support (uptrend) and dynamic resistance (downtrend).
• Price relative to the 200-day SMA is a common bull-vs-bear regime filter.

Momentum & Oscillators

• RSI formula intuition: RSI = 100 − 100 / (1 + RS), where RS = avg gain / avg loss over N periods.
• MACD: MACD line = EMA(12) − EMA(26); Signal = EMA(9) of MACD; Histogram = MACD − Signal.
• Divergence: bullish = price makes a lower low, oscillator makes a higher low (momentum fading on the downside). Bearish = price higher high, oscillator lower high.
• In strong trends, oscillators can remain overbought / oversold for long stretches. Don’t fade strong trends purely on RSI > 70.

Trend-Strength Indicators

• ADX (Average Directional Index): 0–100. Direction-agnostic measure of trend strength. ADX > 25 = trending; < 20 = trendless/range. Trend direction read from +DI vs −DI (when +DI > −DI, uptrend; opposite for downtrend).
• Parabolic SAR: trailing stop indicator. Dots appear above price in downtrends, below in uptrends. Flips on penetration.
• Ichimoku Cloud: combines five lines (Tenkan-sen 9, Kijun-sen 26, Senkou Span A and B, Chikou Span). Cloud (Kumo) above price = bullish regime; below = bearish.

Volume & Money-Flow Indicators

• On-Balance Volume (OBV): cumulative running total: add volume on up-close days, subtract on down-close days. Divergence between OBV and price warns of weak participation.
• Accumulation/Distribution (A/D) Line: volume weighted by where the close sits in the day’s range. Close near high = positive contribution; near low = negative.
• Chaikin Money Flow (CMF): A/D summed over 20 periods, normalized by 20-period volume. Above 0 = buying pressure; below 0 = selling pressure.
• Money Flow Index (MFI): volume-weighted RSI. 0–100; >80 OB, <20 OS.
• Volume-Weighted Average Price (VWAP): intraday benchmark; running cumulative price×volume / cumulative volume. Institutions execute around VWAP.
• Force Index (Elder): (Close − Prior Close) × Volume. Combines direction, magnitude, and volume.

Volatility Bands & Envelopes

• Bollinger Bands: middle = 20-period SMA; upper/lower = middle ± 2σ of price over 20 periods. Squeeze (bands contracting) precedes expansion. Price tagging the upper band in a strong uptrend is normal — not automatically a sell.
• Keltner Channels: middle = EMA(20); upper/lower = EMA(20) ± multiplier × ATR. Smoother than Bollinger.
• Donchian Channels: highest high / lowest low over N periods (e.g., 20). Used in classic trend-following systems (Turtle).
• ATR: Wilder’s smoothed average of true range over 14 periods. TR = max(H−L, |H−PrevClose|, |L−PrevClose|). Used for volatility-adjusted stops, position sizing, and breakout filters.

Pivot Points & Other Tools

• Pivot Points: PP = (H + L + C) / 3; S1, S2, R1, R2 derived from PP. Common in intraday futures and FX.
• Fibonacci retracements/extensions: 23.6, 38.2, 50, 61.8, 78.6% (covered in Trend section).
• Linear regression channel: best-fit line through prices with ±2 standard-error bands.

Signal Generation Patterns to Recognize

• Crossover: MA cross (golden/death); MACD vs signal line; Stochastic %K vs %D.
• Centerline: oscillator crosses zero (MACD, ROC) or 50 (RSI).
• Divergence: bullish/bearish, regular/hidden. Regular divergence signals reversal; hidden divergence signals continuation.
• Overbought/oversold reversion: most reliable in range-bound markets, weakest in strong trends.
• Breakout: Bollinger squeeze release, Donchian breakout.

Common questions

VI. Statistics for Technicians

~6% of exam · Conceptual rather than computational, but you must know every term.

Central Tendency

• Arithmetic mean: Σx / n. Sensitive to outliers.
• Median: the middle value when sorted. Robust to outliers.
• Mode: the most frequent value. Useful for categorical data and identifying multimodal distributions.
• Geometric mean: (∏(1 + r_i))^(1/n) − 1. Correct for averaging multi-period returns (compounded).
• Harmonic mean: used for averaging rates (e.g., average P/E across funds).

Dispersion

• Range: max − min.
• Variance (σ²): average of squared deviations from the mean. Σ(x − μ)² / N (population) or / (n − 1) (sample — Bessel’s correction).
• Standard deviation (σ): square root of variance; same units as data. The workhorse of risk measurement.
• Mean Absolute Deviation (MAD): Σ|x − mean| / n. Robust alternative to std dev.
• Coefficient of variation (CV): σ / μ. Unitless measure of relative variability.

Shape: Skewness & Kurtosis

• Skewness = asymmetry. Positive skew = long right tail (more occasional large gains; common in lottery-like assets). Negative skew = long left tail (occasional large losses; common in credit and short-vol strategies).
• Kurtosis = tail heaviness. Normal distribution has kurtosis = 3 (or excess kurtosis = 0). Leptokurtic = excess kurtosis > 0, fat tails (typical of equity returns). Platykurtic = excess kurtosis < 0, thin tails.
• Financial returns are leptokurtic and often negatively skewed. Extreme moves happen far more often than a normal distribution predicts.

Distributions

Probability Essentials

• Probabilities sum to 1.
• Independent events: P(A ∩ B) = P(A) × P(B).
• Conditional: P(A | B) = P(A ∩ B) / P(B).
• Bayes: P(A | B) = P(B | A) · P(A) / P(B).
• Expected value: E[X] = Σ x_i · P(x_i).

Correlation, Covariance, Regression

• Covariance: cov(x,y) = Σ(x − μ_x)(y − μ_y) / (n − 1). Sign tells direction; magnitude depends on scale.
• Correlation: r = cov(x,y) / (σ_x σ_y). Bounded in [−1, +1].
• Linear regression: y = a + bx + ε. Best-fit line minimizes squared residuals (Ordinary Least Squares).
• R²: proportion of variance in y explained by x. R² = r² in simple regression.
• Correlation ≠ causation; correlations can be spurious or regime-dependent.

Hypothesis Testing

• Set up a null hypothesis (H₀) and an alternative (H₁).
• Compute a test statistic; compare to a critical value (or compute a p-value).
• p < α (typically 0.05) ⇒ reject H₀.
• Type I error = false positive (reject true H₀). Type II error = false negative (fail to reject false H₀).
• Power = 1 − P(type II error).

Backtesting Biases & Defenses

Common questions

VII. Behavioral Finance

~3% of exam · Memorize biases (one-line definitions are enough) and the prospect theory framework.

Prospect Theory in Detail

• Value function: S-shaped — concave for gains (diminishing sensitivity), convex for losses (also diminishing sensitivity, but loss side is steeper).
• Loss-aversion ratio: ~2 (a $100 loss feels like a $200 gain in reverse).
• Reference dependence: gains and losses are measured relative to a reference (often purchase price, or a recent high).
• Probability weighting function: people overweight low-probability events (lotteries, crashes) and underweight high-probability ones.
• Implications for trading: the disposition effect (sell winners early, hold losers), narrow framing (treating each trade in isolation), and mental accounting all flow from prospect theory.

Cognitive (Belief & Information) Biases

Emotional Biases

How Behavioral Biases Drive TA

• Trends persist because anchoring, recency, herding, and momentum chasing keep order flow aligned for longer than fundamentals would suggest.
• Support and resistance form because loss aversion and anchoring create memory at specific prices (people sell at break-even on a level they bought, creating supply).
• Reversals at extremes happen because the disposition effect, capitulation, and emotional exhaustion eventually flip the participant base.
• Bubbles emerge when herding and overconfidence dominate; panics emerge when loss aversion and availability dominate.

Common questions

VIII. Sentiment

~7% of exam · Know every indicator, who it measures, what extremes look like, and when it’s contrarian vs confirmatory.

Survey-Based Sentiment

• AAII (American Association of Individual Investors): weekly bull/bear/neutral survey of retail investors. Watch the bull-bear spread. Extremes (>40% bulls or >40% bears for several weeks) are contrarian.
• Investors Intelligence (II): weekly survey of investment newsletter writers. Bull/Bear ratio > 3 = extreme optimism; < 1 = extreme pessimism. Historically reliable at extremes.
• Consensus Inc. / Market Vane: futures-trader bullish consensus, %. Extremes > 70% or < 30% are watched.
• NAAIM Exposure Index: average equity exposure of active managers (range −200% to +200%). Highs and lows are contrarian.
• University of Michigan / Conference Board consumer confidence: macro mood; extremes precede recessions and recoveries.

Derivatives & Positioning

• Put/Call Ratio (P/C): total put volume / total call volume on an exchange (CBOE). Equity-only P/C < 0.5 = complacent, > 1.0 = fearful. Index P/C is structurally higher because of hedging.
• VIX (CBOE Volatility Index): 30-day implied vol of S&P 500 options. Heuristic ranges: <12 calm/complacent; 12–20 normal; 20–30 stress; >30 fear; >40 crisis. Spike + reversal candle on SPX often marks intermediate lows.
• VVIX: vol of the VIX itself; signals volatility-of-volatility regime.
• Commitments of Traders (COT): weekly CFTC report on futures positioning by commercials (hedgers), large speculators (managed money / funds), and small speculators. Extreme commercial vs. speculator positioning often precedes turns. Commercials tend to be right at extremes; small specs tend to be wrong.
• Short interest: total short shares / float. Rising short interest = bearish positioning. Very high short interest can lead to a short squeeze if price reverses.
• Short interest ratio (days to cover): short interest / average daily volume.

Flow & Activity

• Money market fund (MMF) assets: cash held outside risk assets. Rising MMF assets = potential future buying power (bullish at extremes).
• Mutual fund / ETF flows: net subscriptions vs redemptions. Large inflows often coincide with tops (the public arrives late).
• Margin debt: investor borrowing. Record highs reflect high risk appetite and leverage; subsequent contraction typically accompanies bear markets.
• IPO activity: heavy IPO supply with big first-day pops = late-cycle euphoria.
• Insider transactions: net insider buying = bullish; broad-based insider selling = bearish (though selling can be liquidity-driven so weight broad buying more).
• Cash levels in mutual funds: low cash = fully invested = limited dry powder; high cash = defensive positioning.

Anecdotal Sentiment

• Magazine covers: a story reaching mainstream cover status (Time, Newsweek, BusinessWeek, The Economist) typically marks late-stage consensus — a classic contrarian signal.
• “Cocktail party” / taxi-driver tip-giving: when non-professionals enthusiastically give stock tips, late-cycle behavior is signaled.
• Bookstore section size: too many books on a single sector or strategy = late-cycle.

Composite Sentiment Tools

• CNN Fear & Greed Index: composite of put/call, VIX, junk bond demand, market momentum, breadth, safe-haven demand, and stock-price strength. 0 = extreme fear; 100 = extreme greed. Extremes > 75 or < 25 are watched.
• SKEW Index: measures the perceived tail-risk priced into out-of-the-money SPX puts. Rising SKEW = fear of crash.

Common questions

IX. Cycle Analysis

~4% of exam · Memorize named cycles, the principles, and the basic anatomy of a cycle.

Anatomy of a Cycle

• Amplitude: vertical distance from trough to peak. Bigger amplitude = larger moves.
• Period: time from trough to next trough (or peak to next peak).
• Phase: where in the cycle we are now — rising, topping, falling, or basing.
• Frequency: number of cycles per unit time (= 1 / period).

Hurst’s Cycle Principles

• Summation: any observed cycle is the sum of many underlying cycles of different periods.
• Harmonicity: cycles tend to be related by simple integer multiples (e.g., 2× or ½).
• Synchronicity: cycles of similar length across different markets tend to bottom at the same time.
• Proportionality: longer cycles have larger amplitudes.
• Variation: real cycles vary in period and amplitude around an ideal mean.
• Nominality: there is a “nominal” set of cycle periods that recur across markets (e.g., 80-day, 40-day, 20-day, 10-day cycles).

Named Cycles

Tools for Cycle Analysis

• Visual identification: peak-to-peak, trough-to-trough measurement on the chart.
• Detrended Price Oscillator (DPO): removes trend from price to isolate cyclical component. Plot of Close − SMA(N) shifted (N/2 + 1) periods back.
• Centered moving averages: smooth out cycles to reveal underlying trend.
• Spectral / Fourier analysis: decompose price into component frequencies. Identify dominant cycle periods.
• Cycle channels / envelopes: bands constructed around an ideal cycle path.
• MESA (Maximum Entropy Spectral Analysis): Ehlers’ adaptive cycle work.

Common questions

X. Comparative Market Analysis & Intermarket

~10% of exam · The largest curriculum unit. Master relative strength, sector rotation, breadth, and bond-curve basics.

Relative Strength (RS) — Not RSI

• RS ratio = numerator / denominator (e.g., stock / sector, sector / market, country / world).
• Trend in the RS line matters more than the absolute level.
• Use to find leadership rotation (which sectors / countries / styles are outperforming), and to evaluate single-stock alpha vs its sector.
• Common pairings: small cap (IWM) vs large cap (SPY); growth (IWF) vs value (IWD); cyclicals vs defensives; high-beta vs low-vol.
• An RS line breaking out (new highs) before the absolute price line is a leadership signal.

Intermarket Relationships (general / long-run)

Sector Rotation Through the Business Cycle

1. Early expansion (recovery): financials, consumer discretionary, technology, transports. Falling rates, rising risk appetite.
2. Mid expansion: industrials, basic materials. Capital expenditure and demand rising.
3. Late expansion / peak: energy, materials, consumer staples begin to outperform; inflation pressures rise.
4. Recession / contraction: defensives lead — utilities, consumer staples, healthcare. Earnings stability matters.
5. Early recovery: cyclicals reassert leadership; the cycle restarts.

The 11 GICS Sectors (the trading universe)

• Communication Services (XLC), Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Health Care (XLV), Industrials (XLI), Information Technology (XLK), Materials (XLB), Real Estate (XLRE), Utilities (XLU).

Market Breadth Indicators

Bonds & Fixed Income (essentials)

• Inverse relationship: bond prices fall when yields rise, and vice versa.
• Duration: bond price sensitivity to a 1% change in yields. Longer maturity, lower coupon = higher duration.
• Yield curve: plot of yield vs maturity. Normal = upward sloping; flat = late-cycle warning; inverted = recession warning (especially 2s10s, 3m10y).
• Credit spreads: HY (high-yield) yield minus Treasury yield. Widening = stress; tightening = risk-on.
• TED spread: 3-mo LIBOR minus 3-mo T-bill. Stress indicator (largely historical).
• Bond market vs stock market: bond market is much larger; bond signals often precede equity turns.

Currencies (essentials)

• DXY (U.S. Dollar Index): trade-weighted basket vs major currencies (EUR ~58%, JPY, GBP, CAD, SEK, CHF).
• Dollar strength: typically pressures commodities, EM equities, USD-denominated foreign assets.
• Carry trade: borrow in low-yielding currency (e.g., JPY), invest in high-yielding currency (e.g., MXN, BRL). Unwinds during risk-off (currency vol spikes).

Common questions

XI. Volatility Analysis

~7% of exam · Distinguish realized vs implied vol cold; know VIX construction and behavior; understand skew, ATR, and BBands.

Realized Volatility

• Standard deviation of log returns over a lookback window.
• Annualization factor: √252 for daily; √52 for weekly; √12 for monthly.
• Common windows: 20-day, 60-day, 252-day.
• Realized vol is backward-looking; useful for risk reporting and as a baseline for comparing IV.

Implied Volatility (IV)

• Derived from market option prices by inverting Black-Scholes.
• Inputs that move IV: underlying expected variability, time to expiration, supply/demand for options, hedging activity.
• IV is forward-looking; the market’s consensus view of future vol.
• IV minus realized vol (vol premium): tends to be positive on average (options are slightly “rich”), but compresses or inverts in crises.

VIX in Depth

• Calculated from a wide strip of out-of-the-money SPX puts and calls, weighted by strike and expiration.
• Reports as an annualized percentage — e.g., VIX 20 means options imply ~20% annualized SPX vol over the next 30 days, or ~1.25% expected daily move (20 / √252 ≈ 1.26).
• Heuristic ranges: <12 calm/complacent; 12–20 normal; 20–30 elevated; 30–40 stress; >40 crisis.
• Historical extremes: dotcom bust ~46; 2008 GFC peak ~89; COVID March 2020 peak ~82.
• VIX is negatively correlated with SPX ~−0.75 to −0.85; VIX usually spikes during market declines, not before.
• VIX term structure: VIX front month vs VX futures further out. Normal = contango (front below back). Inverted = backwardation (front above back) = stress signal.
• VVIX: vol of VIX; signals how nervous the vol market itself is.

ATR & Volatility-Based Stops

• True Range: max(H−L, |H−PrevClose|, |L−PrevClose|).
• ATR: Wilder’s smoothed average of TR over 14 periods.
• Uses: position sizing (risk per trade = N×ATR), trailing stops (chandelier exit = high − 3×ATR), breakout filters.

Bollinger Bands & Volatility Squeeze

• Middle = 20-period SMA; upper/lower = SMA ± 2σ of price over 20 periods.
• Squeeze: bandwidth (upper−lower) at a low percentile of its history; signals coming expansion.
• Tagging the upper band in a strong uptrend is not automatically a sell — it can be a sign of strength.
• %B = (Price − Lower) / (Upper − Lower). >1 = above upper band; <0 = below lower band.
• Bandwidth = (Upper − Lower) / Middle. Used to spot squeezes.

Volatility Skew & Term Structure

• Skew: difference in IV across strikes at one expiration. Equity skew typically downside-tilted (OTM puts > ATM IV > OTM calls).
• SKEW Index: CBOE measure of perceived crash risk from far OTM SPX puts.
• Smile: more symmetric U-shaped IV (typical in FX).
• Term structure: IV across expirations (e.g., 30-day vs 90-day). Steep upward sloping = calm; flat or inverted = stress.

Common questions

XII. Systems & Quantitative Methods

~3% of exam · Know the quant process, pitfalls list, validation tools, and core risk metrics.

Why Systematize?

• Removes emotion and inconsistent execution.
• Makes performance measurable, attributable, and repeatable.
• Forces explicit risk control (stops, sizing, exposure limits).
• Enables backtesting and parameter robustness checks.
• Scales across instruments and time frames.

The Quantitative Process (in order)

1. Hypothesis: e.g., “Stocks that are above their 200-day SMA and in the top 20% RS over 6 months outperform in the following month.” Must be falsifiable.
2. Data: source equities universe (with delisted names), futures continuous contracts (back-adjusted), point-in-time fundamentals if relevant. Strip survivorship bias.
3. Signal construction: code the rules. Include long/short/flat states.
4. Backtest: realistic assumptions — bid/ask spread, commissions, market-impact model, capacity (% of ADV), borrow costs for shorts. Include warm-up period.
5. Validation: in-sample / out-of-sample split (e.g., 70/30); walk-forward analysis (re-fit on rolling window, test on next window); sensitivity (vary parameters ±25%; results should be stable); Monte Carlo trade resampling.
6. Risk overlay: max drawdown limit, max position concentration, portfolio vol target, leverage cap, correlation budget across signals.
7. Paper trading / live with small size: catch implementation issues (order routing, data lag).
8. Monitoring: live Sharpe vs backtested Sharpe, drawdown vs expected, regime classification, decay detection. Re-validate quarterly or after major regime shifts.

Common Pitfalls (memorize this list)

Validation Tools

• In-sample vs out-of-sample split: e.g., 70% IS / 30% OOS. Fit on IS only; test on OOS.
• Walk-forward analysis: re-fit parameters on a rolling in-sample window; test on the next out-of-sample window; advance and repeat.
• Sensitivity analysis: vary parameters ±10–25%; results should remain stable. A strategy whose Sharpe collapses when a parameter moves slightly is overfit.
• Monte Carlo: randomize trade order or returns to gauge robustness of drawdowns and equity curves.
• Bootstrap: resample returns with replacement to derive confidence intervals on Sharpe, drawdown, etc.
• Stress testing: simulate historical crisis windows (1987, 1998 LTCM, 2008 GFC, 2020 COVID, 2022 inflation shock).

Core Risk & Performance Metrics

Position Sizing

• Fixed dollar: risk $X per trade. Simple but ignores account growth.
• Fixed fractional: risk a fixed % of equity (e.g., 1% per trade). Account compounds.
• Volatility-adjusted: position size = (Risk $ per trade) / (N × ATR per share). Normalizes risk across instruments.
• Kelly criterion: f* = (p × b − q) / b, where p = win%, q = 1−p, b = payoff ratio. Mathematically optimal; in practice, use fractional Kelly (e.g., half-Kelly) to reduce drawdown.

Common questions

Final 24-Hour Checklist

High-yield numbers and definitions to lock in

1. Three core TA assumptions: discount, trend, repeat.
2. Dow Theory’s six tenets and three trend phases (accumulation / public participation / distribution).
3. Definitions: support, resistance, uptrend (HH/HL), downtrend (LH/LL), polarity (broken support becomes resistance).
4. Identify on sight: H&S, inverse H&S, double top/bottom, triangles (sym/asc/desc), flag, pennant, rectangle, cup & handle.
5. Default settings: RSI 14 (OB 70/OS 30), MACD 12/26/9, BBands 20/2, ADX 14 (trending > 25), Stochastics 14/3/3 (OB 80/OS 20), ATR 14, CCI 20.
6. Golden cross (50 MA > 200 MA) / death cross definitions.
7. Fibonacci retracements: 23.6, 38.2, 50, 61.8, 78.6%. Golden ratio = 61.8%.
8. Normal-distribution rule (68/95/99.7) and what skew/kurtosis mean. Returns are leptokurtic, often negatively skewed.
9. Loss aversion ratio ~2:1. Prospect theory: S-shaped value function.
10. VIX = 30-day implied vol of SPX options. <12 complacent, 20+ stressed, 30+ fear, 40+ crisis. Annualization factor for daily vol = √252.
11. Intermarket: bonds inverse to yields; dollar usually inverse to commodities; gold inverse to real yields.
12. Sector rotation: early (cyclicals: discretionary, tech, financials) → mid (industrials, materials) → late (energy, staples) → recession (utilities, staples, healthcare).
13. Sentiment extremes are contrarian. P/C high = bullish; magazine covers = late-stage consensus; MMF assets rising = sidelined cash.
14. Backtest pitfalls: overfit, survivorship, look-ahead, data-snooping. Defense = walk-forward + parsimony + OOS.
15. Risk metrics: Sharpe = excess / total vol; Sortino = excess / downside vol; Calmar = return / max DD; profit factor = gross profit / gross loss.
16. Charter requirements: pass I/II/III + 3 yrs experience + Member in good standing + Code & Standards + sponsorship.
17. Ethics: 7 Standards. Mosaic theory OK; trading on material non-public info NOT OK. Priority of transactions: clients > employer > personal.

Exam-day tactics

• Pace = 132 questions in 120 minutes ≈ 54 seconds per question. Don’t camp on any single item more than ~90 seconds.
• Plan 4 passes: (1) fast pass answering every easy item; (2) work the medium items; (3) tackle the hard items; (4) review flagged items in the final ~10 minutes.
• Flag and move on whenever you’re uncertain. Return at the end.
• Eliminate absolutist answers (“always,” “never,” “guarantees,” “automatically”) first.
• If two options look right, pick the one that better matches the specific language of the CMT curriculum.
• Trust your first instinct unless you find a clear contradiction.
• Answer every question — there is no penalty for guessing.
• Arrive 30 minutes early with valid photo ID. No personal items in the testing room.

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