2014 CMT LEVEL III

SAMPLE EXAM A

PREFACE

The following document is a sample exam with questions constructed in a manner similar to
those from past exams. These sample questions should help candidates form an accurate
expectation about the structure and language of exam questions. Please note that the Level III
exam is completely re-written each time it is administered. Candidates should take care not to
expect the point distribution or the topics to remain exactly the same from one exam to the next.

The CMT Level III exam is comprehensive in nature. Exam questions are drawn primarily from
the Level III exam reading assignments, but not exclusively. One or two questions may be drawn
from the reading assignments of Level I and Level II exams. The choice of topics drawn from
outside the reading list is subject to change from one exam to the next.

The actual Level III exam first presents a table of contents to the candidate. The information in
this table is designed to help candidates understand the scope of topics on the exam and also to
efficiently allocate their time during the four-hour exam. The questions are organized by topic
into question groups. Each question is made up of smaller parts which are scored individually,
but the point values for each category of the questions are important. They signify a suggested
weighting for the time candidates should spend (roughly 1 point per minute spent during the
test).

These sample questions are shown to have a range of point values assigned to them. The actual
exam does not have a range but rather uses specific numbers. The variation in the sample exam
reflects the fact that the exam weighting will change with each administration depending on the
complexity of questions written each year.

Please note that this sample question booklet was prepared independent from the actual exam to
ensure the security of the exam questions. In some aspects, these sample questions are designed
differently from the exam so as to better serve as a review for candidates. For example, many
questions and/or answers may be longer than in the actual exam so that the questions and
answers serve as a review of the material.

The MTA maintains a discussion group forum for CMT candidates on its web site. Candidates
are encouraged to utilize this resource and to discuss any areas of the Body of Knowledge with
which they are not familiar.

This book of practice exams is produced by:
Market Technicians Association, Inc.,
61 Broadway, Suite 514
New York, NY 10006



Sample Table of Contents

Question# Topic Point range

1 MTA Code of Ethics (12 pts)
2 Point and Figure (20 to 40 Points)
3 Intermarket Analysis (20 to 40 Points)
4 Market Breadth (10 to 25 points)
5 Sentiment (10 to 25 Points)
6 Strategy and Techniques (20 to 40 Points)
7 Elliott Wave (20 to 40 Points)
8 Candlestick Analysis (20 to 40 Points)
9 Behavioral Finance (20 to 40 Points)

Typical Instructions to Candidates:
Save your answers frequently.
Cutting and pasting answers from one page/screen to another page/screen is not available.
You can skip questions and return to them before submitting your final answers.
Bullet point lists and short phrases are acceptable answers, and preferred over essay answers.
For planning purposes, the point value of each question suggests the amount of time necessary to
answer the question: roughly 1 minute per point.
Charts are embedded within this exam. If you click the chart box on the question page you can
access a better view of each chart.
The chart package that was given to you will be destroyed after the exam. Graders will not see
any notes written on the chart booklet. Graders only consider your responses to the exam
questions on the electronic module.
Candidates are prohibited from discussing the content of the exam with anyone. Do not disclose
any information regarding the content of this exam on any blogs, forums, discussion groups
or by any other means of communication verbal, written or electronic.
Do not exit until you are ready to close your exam session. It will not be possible to re-enter the
exam module once you have exited the session.



NOTE: Some questions may be slightly modified from the previous sample exam
released earlier. This version supersedes all previous versions.

Answers are listed at the end of the exam.


Question #1: Ethics
(12 points)

1A. Raj Nayyar, CMT, published an article on his companys website that detailed an analysis of
a companys stock price; however, the analysis he published was largely formed from the
analysis of co-worker Howie Helberg, CMT, whose name he did not mention. He didnt
copy any of the text from Howies report, so Raj figured he didnt need permission.
Based on this information, which of the following statements is most accurate?

1. Raj violated Ethics Standard 8 regarding publishing the work of another CMT without
prior written consent.
2. Raj did not violate Ethics Standard 8 because the work was not publically available.
3. Raj did not violate Ethics Standard 8 because the other CMT worked for the same firm as
Raj and Raj represented them both.
4. Raj did not violate Ethics Standard 8 because he and the other CMT are close personal
friends with an ongoing understanding of such situations.

1B. Cynthia Davis, CMT, publishes a buy recommendation on XYZ stock after having
recommended the stock to her parents and siblings last week.
Based on this information, which of the following statements is most accurate?

1) Cynthia violated Ethics Standard 1 regarding professional behavior. She should have
been more careful.
2) Cynthia violated Ethics Standard 7 regarding allowing adequate time to act on a
recommendation before acting on behalf of clients or family members.
3) Cynthia did not violate Ethics Standard 7 because she was only giving advice, not acting
on their behalf.
4) Cynthia did not violate Ethics Standard 1 because she did nothing illegal.




1C. Dolo Zombor, CMT, also has an MBA and a Ph.D. in Economics. For 10 years her work
included fundamental valuations of international companies. Later in her career she studied
technical analysis and obtained her CMT. She is currently employed as a general analyst by
a long-short hedge fund. Her firm asked for a written opinion on a Mumbai-based company
with which she was familiar. They also asked her not to use the CMT designation behind
her name on this report since the audience for this report is more often opposed to technical
analysis. She published the report based on fundamental factors she knew how to calculate,
then included her conclusion that the company in question should be shorted.
Based on this information, which of the following statements is most accurate?

1. Dolo violated Ethics Standard 9 regarding use of the CMT after her name on a
publication.
2. Dolo did not violate Ethics Standard 9 because it references appropriate use.
3. Dolo violated Ethics Standard 1 regarding professional behavior, because she represented
herself as a fundamental analyst even though she is employed as a technician.
4. Dolo did not violate Ethics Standard 1 regarding professional behavior because the
company she analyzed actually did go bankrupt six months later.

1D. Michihiro Atsuki, CMT, published an article which included the text our proprietary
technical model recommends investors buy this stock. It has a price target 80 percent above
current levels. The proprietary method was a well-documented method derived from
Constance Browns writings on Fibonnaci extensions. Even though the proprietary method
generated a target only 40% higher, he found a large flag pattern that gave the 80%
projection.
Based on this information, which of the following statements is most accurate?

1. Yoshihiro violated Ethics Standard 2 regarding not publishing misleading statements and
Standard 3 providing full documentation of the technical analysis concepts behind the
proprietary model.
2. Yoshihiro violated Ethics Standard 3 only
3. Yoshihiro violated Ethics Standard 2 only.
4. Yoshihiro did not violate any standards because the proprietary model was well
documented and consistent with acceptable standards of technical analysis.





Question #2: Point and Figure
20 to 40 Points


Chart 1 to answer question parts 2A, 2B, 2C, and 2D.



Chart 1
(NOTE: this question and its accompanying graphic have been altered from the previously
published sample exam.)

Chart 1 is a three box reversal chart, 2 points per box.

2A. What is the most recent vertical price objective? Write out your work.


2B. What is the stop price and what is the risk reward ratio assuming an entry at 124, based on
the vertical price objective in 2A?


2C. What is the most recent horizontal price objective? Show your work.

2D. Assuming an entry at 124 and working from the horizontal price objective, define the stop
price and the risk reward ratio, and explain whether this analysis supports the vertical price
objective analysis or not.






Chart 2

2E. Is the trendline break identified above by the large blue line valid or not?
Explain.


2F. List the guidelines associated with breaks of point and figure trend lines.





Question #3: Intermarket Analysis
20 to 40 Points

You work for a firm that provides technical research to institutional clients and you have been
tasked with providing your clients a monthly update on price trends in the 20-year US Treasury
market. The following four charts are weekly charts with the months marked in light grid lines.
Study these to respond to questions 3A, 3B and 3C.


Chart 3


Chart 4




Chart 5



Chart 6

3A. State your two-to-four-month forecast for TLT in no more than two sentences.

3B. Identify any specific correlations you find in the four charts.

3C. Explain how the correlations or other evidence you find within these charts supports your
forecast.






Question #4: Market Breadth
(10 to 20 Points)


You are asked to analyze the following charts to determine if there is a divergence between these
two charts: (1) the Dow Jones Industrial Average, and (2) the advance-decline (A/D) line chart
for the NYSE.


Chart 7
4A. Identify the most significant divergence you observe.

4B. Explain why the divergence you observe represents a bearish or bullish indication or why it
does not represent either.




Question #5: Sentiment
(10 to 20 Points)

A colleague is anticipating a change of market direction in the near future. She asks for your
opinion on whether market sentiment shows any signs that a change in direction is imminent.
You compare the CBOE Volatility Index (VIX) and the S&P 500 (using SPY) as shown in the
charts below to help you identify evidence.

Chart 8


Chart 9
5A. Using the price points ( through ) as markers, describe the comparison between the two
charts to explain the state of the current market sentiment as seen from the comparison of
the S&P 500 and the VIX.

5B. Explain the evidence that exists of an imminent trend change, if any, or of a confirmation of
the current trend. If neither exists then explain the lack of usable evidence from the VIX in
sentiment analysis.



Question #6: Strategies and Techniques
(20 to 40 Points)

The daily price chart below (Chart 9) is plotted along with Bollinger Bands, Moving Average
Convergence Divergence (MACD) and ADX indicators. It is used to answer 5A, 5B, 5C and 5D.
Chart 10
You have been tasked with identifying the risk associated with investing in the stock shown in Chart. The
two Xs delineate a chart pattern that formed earlier; the two Ys represent points of interest in a developing
pattern.
6A. Identify the chart pattern marked by the Xs, its breakout point, and target price.

6B. Explain whether or not the chart patterns projected move to its target price move has been
completed or if the stock should move lower still based on the projection.

6C. Identify the developing chart pattern market by the Ys, its breakout point and target price.

6D. Based on your answer in 6C, explain your forecast for the stock over the next two months using all
available evidence.
6E. Assuming no risk from gaps, explain the dollar value at risk for your firm if they were to purchase
50,000 shares of the stock at the last closing price of $6.61 and set a stop loss just below a price
which would invalidate the developing pattern.



QUESTION #7: Elliott Wave
(20 to 40 Points)

On the chart below (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.


Chart 11

Using the prices from chart 11 above:

7A. 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)

7B. Identify the type of corrective pattern following the high at 37.65 by describing its wave
structure.

7C. What do you see as the next trading opportunity on this chart? Describe your analysis.
Include Fibonacci relationships that support your analysis.



Question #8: Candlestick Analysis
(20 to 40 Points)

You are a newly appointed consultant to an endowment fund that wants to liquidate a large
holding in their portfolio. The fund wants you to verify that the price is likely to be going up
because they want to sell into strength. You have been asked to deliver an analysis of whether
there is any evidence on the chart below to suggest that the stock is showing strength. This chart
includes candle patterns plus a momentum line, technical study below the chart area.



8A. Name four candlestick patterns in the last 25 candles which show evidence of buyer interest
in this stock

8B. Describe additional, non-candlestick evidence of bullish potential on the chart.

8C. Describe two instances anywhere on this chart that candlestick patterns coincide with non-
candlestick evidence to further support the expectation of continued buying strength in this
stock.



Question #9: Behavioral Finance
(20 to 40 Points)

Your portfolio manager has tasked you with identifying the advantages and disadvantages of
shortening the time-horizon for the funds investment choices to less than one year.

9A. Discuss two primary implications of a short-term horizon and why it can lead to
underperformance using examples from Montiers research.

9B. Which behavioral bias leads managers to focus on short-term holding periods and what can
be done about changing that focus?



9C. Montier explains that there are two sides of the brain and each act very differently in the
influence of investment decision making. State the two systems and discuss the key
influences of each.

System X: Reflexive, primitive emotional decision making takes place. The McCoy human
side. Intuition and gut feel drive the output. Holistic, Feels good, rapid parallel processing,
slow to change, broad generalizations, crudely integrated, vivid imagery, experience
passively and precociously, automatic, effortless.

System C: Reflective, logical deliberate effort. Deductive and computer like. The Spock
Vulcan side. Can only follow one step at a time like a serial processor. Abstract imagery,
changes with speed of thought, highly integrated. Requires justification and evidence.




Answers to Question #1: Ethics

. Raj Nayyar, CMT, published an article on his companys website that detailed an analysis of a
companys stock price; however, the analysis he published was largely formed from the
analysis of co-worker Howie Helberg, CMT, whose name he did not mention. He didnt
copy any of the text from Howies report, so Raj figured he didnt need permission.
Based on this information, which of the following statements is most accurate?

5. Raj violated Ethics Standard 8 regarding publishing the work of another CMT without
prior written consent.
(Ethics standard 8 includes professional courtesy as well as plagiarism. This is the correct
answer because his analysis built on a fellow CMT who should be credited for his work.)
6. Raj did not violate Ethics Standard 8 because the work was not publically available.
7. Raj did not violate Ethics Standard 8 because the other CMT worked for the same firm as
Raj and Raj represented them both.
8. Raj did not violate Ethics Standard 8 because he and the other CMT are close personal
friends with an ongoing understanding of such situations.

1B. Cynthia Davis, CMT, publishes a buy recommendation on XYZ stock after having
recommended the stock to her parents and siblings last week.
Based on this information, which of the following statements is most accurate?

1) Cynthia violated Ethics Standard 1 regarding professional behavior. She should have
been more careful.
(Ethics standard 7 specifically mentions placing trades in an account which implies that
she, or her firm, is actively buying shares ahead of those to whom she recommends the
security. In this scenario she doesnt execute trades for anyone nor is there information
that a related part of her firm executed trades in front of the recommendation. While that
could have happened, it is not the most accurate information here. If she simply showed
up a family barbeque and talked up the security, she wouldnt have done something
illegal, but it was sloppy and may have hurt her clients ability to benefit from her
research.)

2) Cynthia violated Ethics Standard 7 regarding allowing adequate time to act on a
recommendation before acting on behalf of clients or family members.
3) Cynthia did not violate Ethics Standard 7 because she was only giving advice, not acting
on their behalf.
4) Cynthia did not violate Ethics Standard 1 because she did nothing illegal.




1C. Dolo Zombor, CMT, also has an MBA and a Ph.D. in Economics. For 10 years her work
included fundamental valuations of international companies. Later in her career she studied
technical analysis and obtained her CMT. She is currently employed as a general analyst by
a long-short hedge fund. Her firm asked for a written opinion on a Mumbai-based company
with which she was familiar. They also asked her not to use the CMT designation behind
her name on this report since the audience for this report is more often opposed to technical
analysis. She published the report based on fundamental factors she knew how to calculate,
then included her conclusion that the company in question should be shorted.
Based on this information, which of the following statements is most accurate?

5. Dolo violated Ethics Standard 9 regarding use of the CMT after her name on a
publication.
6. Dolo did not violate Ethics Standard 9 because it references appropriate use.
(This is most accurate since Dolos work was non-technical in nature, she was skilled to
do the work, she is hired as a general analystnot a technician specificallyand was not
making misleading statements. Additionally because of the views of her companys
clientele, the use of the CMT designation would be an unnecessary distraction.)
7. Dolo violated Ethics Standard 1 regarding professional behavior, because she represented
herself as a fundamental analyst even though she is employed as a technician.
8. Dolo did not violate Ethics Standard 1 regarding professional behavior because the
company she analyzed actually did go bankrupt six months later.

1D. Michihiro Atsuki, CMT, published an article which included the text our proprietary
technical model recommends investors buy this stock. It has a price target 80 percent above
current levels. The proprietary method was a well-documented method derived from
Constance Browns writings on Fibonnaci extensions. Even though the proprietary method
generated a target only 40% higher, he found a large flag pattern that gave the 80%
projection.
Based on this information, which of the following statements is most accurate?

5. Yoshihiro violated Ethics Standard 2 regarding not publishing misleading statements and
Standard 3 providing full documentation of the technical analysis concepts behind the
proprietary model.
6. Yoshihiro violated Ethics Standard 3 only
7. Yoshihiro violated Ethics Standard 2 only.
The large flag pattern is independent of the proprietary method. Even if the flag pattern
were correctly interpreted, it was not part of the proprietary method and the published
statement implied that the 80% projection came from the proprietary method.
8. Yoshihiro did not violate any standards because the proprietary model was well
documented and consistent with acceptable standards of technical analysis.





Answers to Question #2: Point and Figure

Chart 1 to answer question parts 2A, 2B, 2C, and 2D.



Chart 12
(NOTE: this question and its accompanying graphic have been altered from the previously
published sample exam.)

Chart 1 is a three box reversal chart, 2 points per box.

2A. What is the most recent vertical price objective? Write out your work.

The vertical price objective can be found by totaling the third column from the right which
begins at 106 and travels to 124. This 18 point move is multiplied by 3 and for a total of 54
points, which when added to 104, the base of the previous column, comes to 158.

2B. What is the stop price and what is the risk reward ratio assuming an entry at 124, based on
the vertical price objective in 2A?

The Stop price is 102, one box below the low where a new sell signal would be generated.
Entry is 124 for a difference of 22 points move down to the stop. With the price objective of
158, then the risk (22) compared to the reward (158 124 = 34) equals 22 to 34 or 1 to 1.55

2C. What is the most recent horizontal price objective? Show your work.

The horizontal price objective can be found by counting the width beginning from the column of
Os that takes place during August 2011, where the consolidation pattern begins, to the
column of Xs that leaves the pattern between October and November of 2011. The width of
the pattern at this point is 10 columns. (10 x 3 x 2 = 60)



These are two point boxes so that signifies a 60 point move higher from the base of 104, and this
creates a target of 164.

2D. Assuming an entry at 124 and working from the horizontal price objective, define the stop
price and the risk reward ratio, and explain whether this analysis supports the vertical price
objective analysis or not.

The Stop price is 102, entry is 124 for a difference of 22 points move. With a price objective of
164, then the risk (22) compared to the reward (164 124 = 40) equals 22 to 40 or 1 to 1.8.
Since the horizontal price objective is higher than the vertical price objective then this
supports the vertical price objective as a minimum estimated target.



Chart 13

2E. Is the trendline break identified above by the large blue line valid or not?
Explain.

The price has not closed fully above the 45 degree trendline; no it is not a valid trend break yet.

2F. List the guidelines associated with breaks of point and figure trend lines.

The move above the trend line must fill a box which moves entirely above the trendline (both the
start and finish of the box must be fully above the trend line.





Answers to Question #3: Intermarket Analysis

You work for a firm that provides technical research to institutional clients and you have been
tasked with providing your clients a monthly update on price trends in the 20-year US Treasury
market. The following four charts are weekly charts with the months marked in light grid lines.
Study these to respond to questions 3A, 3B and 3C.


Chart 14


Chart 15




Chart 16



Chart 17
3A. State your two-to-four-month forecast for TLT in no more than two sentences.

TLT is likely to trend higher. Especially if SPY follows the signals given by DBC and FXE

3B. Identify any specific correlations you find in the four charts.

CRB, the Commodity Index, and FXE, the Euro ETF, appear correlated. This shows that the
commodities are moving inversely to the US Dollar, because if FXE, an ETF based on the
value of the Euro (priced in US Dollars) is moving lower, it means the Dollar is moving
higher. This identifies that the Dollar is having an overriding impact on commodities, and
the for the near future the Dollars movements will be more influential to commodities than
many other factors.

TLT and SPY appear inversely correlated and have been moving roughly opposite for the
duration of the chart. Because TLT is an ETF which represents the price of long-dated US
Govt. Treasury bonds, it can be thought of as a surrogate for the bond market. These two
ETFs thus show a comparison between the stock market and the bond market. When bond


markets turn bullish at the same time that the stock market shows signs of turning bearish, it
represents the flight to safety by investors,.

SPY has been lagging behind the moves on DBC, and both DBC and FXE have shown a major
trend reversing signal. This may mean that SPY will soon show a similar signal.


3C. Explain how the correlations or other evidence you find within these charts supports your
forecast.

Because TLT and SPY are inversely correlated, the fact that TLT has already begun its turn is an
indication that SPY will have pressure on its prices. The investor flight to safety appears to
have begun and it may just be getting started.

Because SPY is lagging in its turns compared to DBC and FXE, the fact that DBC and FXE both
made coordinated signals, a massive bearish engulfing top, it is possible that though SPY
fell in price for the most recent week, the full effect of price pressure from a flight to safety
has not yet shown on SPY. So it may yet be coming.

Because DBC and FXE are tightly correlated it appears that the impact of the US Dollar is
unusually heavy on commodities right now and that further reinforces the notion that
investors are seeking a flight to safety.

All three of these points give evidence that the turn in TLT is possibly just the beginning of this
move and that it could continue for another couple of months at least.



Answers to Question #4: Market Breadth


You are asked to analyze the following charts to determine if there is a divergence between these
two charts: (1) the Dow Jones Industrial Average, and (2) the advance-decline (A/D) line chart
for the NYSE.


Chart 18
4A. Identify the most significant divergence you observe.

Possible Correct Answer #1: The 1998 peak and the 2004 peak on the DJIA look bullish relative
to one another while the Advance Decline line shows significantly lower peaks for those
years

Possible Correct Answer #2: The Advance Decline line made lower relative peaks when
comparing the indicators movement from 1999 all through 2007, while the Dow Jones
Industrial Average made higher peaks at those same points.

Possible Correct Answer #3: The Advance Decline line shows a higher trough in 2009
compared to 2003, while the DJIA shows lower troughs at the same place.

4B. Explain why the divergence you observe represents a bearish or bullish indication or why it
does not represent either.



Possible Correct Answer corresponding to #1 above: Advance Decline lines have a downward
bias naturally so while this looks like a bearish divergence it is simply normal and likely
irrelevant.

Possible Correct Answer #2: Advance Decline lines have a downward bias naturally so while
this looks like a bearish divergence, and even though 2008 was a very bearish year, the line
gave an even more pronounced divergence in 2004 that showed no drop in price, so it is
simply normal for the lines to diverge like this and likely irrelevant as a forecasting signal.

Possible Correct Answer #3: Advance Decline lines have a downward bias naturally so when a
bullish divergence occurs it has done so even against the mathematical bias of the indicator and it
should be paid attention to. It is likely an important signal as has been shown by the price action
of the last few years.

Answers to Question #5: Sentiment


A colleague is anticipating a change of market direction in the near future. She asks for your
opinion on whether market sentiment shows any signs that a change in direction is imminent.
You compare the CBOE Volatility Index (VIX) and the S&P 500 (using SPY) as shown in the
charts below to help you identify evidence.

Chart 19




Chart 20
5A. Using the price points ( through ) as markers, describe the comparison between the two
charts to explain the state of the current market sentiment as seen from the comparison of
the S&P 500 and the VIX.

The VIX and SPY are generally inversely correlated. When the SPY is making a new peak, the
VIX should be making a relative trough as shown by points 1, 2, and 3. At point 4 the VIX
gives a notably leading divergence when the VIX makes a lower relative peak, though the
SPY made a lower trough (it should have been higher). This indicated the short-term bullish
move ahead up to point 5.

In points 6 and 7 however something larger has begun to change. The VIX has made a peak
equal to point 4 (at point 6), and then another peak (point 7) that surpasses point 6. Because
point 6 and point 7 are not far removed from point 4 in time, these VIX levels should
produce a move in the SPY that falls back to the trough in point 4, but SPY has not done so
implying one of two things: either the VIX will soon drop dramatically to better align itself
with the price action of the SPY, or SPY will soon drop dramatically to better align itself
with the VIX.


5B. Explain the evidence that exists of an imminent trend change, if any, or of a confirmation of
the current trend. If neither exists then explain the lack of usable evidence from the VIX in
sentiment analysis.

Because the VIX is derived from options pricing, it is naturally a forward looking instrument and
is therefore more likely to be a leading indicator in times of divergence from the S&P 500
index rather than a trailing one. Points 6 and 7 seem to indicate that the sentiment of traders
and investors has become very bearish, even though the index has shown a relatively small
indication of selling activity which has not brought the price action anywhere near the old
lows. This give evidence that a serious correction, if not outright trend change, may be
forthcoming. Given that the general trend of the chart is a sideways channel, it is likely that
the index will break that channels support level and begin a new downward trend.



Answers to Question #6: Strategies and Techniques


The daily price chart below (Chart 9) is plotted along with Bollinger Bands, Moving Average
Convergence Divergence (MACD) and ADX indicators. It is used to answer 5A, 5B, 5C and 5D.

Chart 21
You have been tasked with identifying the risk associated with investing in the stock shown in
Chart. The two Xs delineate a chart pattern that formed earlier; the two Ys represent points of
interest in a developing pattern.
6A. Identify the chart pattern marked by the Xs, its breakout point, and target price.

This marks a double-top pattern. Its breakout would occur at $7, and its target price, based on
the height of the pattern from the breakout price to its peak at $7.70, would be seventy cents
lower, or $6.30.




6B. Explain whether or not the chart patterns projected move to its target price move has been
completed or if the stock should move lower still based on the projection.

The stock completed the projected move. The double top pattern does not predicted any further
move, up or down, beyond this point.

6C. Identify the developing chart pattern market by the Ys, its breakout point and target price.

This price action appears to be an incomplete inverse head and shoulders pattern. This pattern
has not fully developed, but has developed far enough that if the price were to move above
$6.70 in the next few days it would constitute a breakout and the pattern would be complete.
The target price for the pattern would be at least fifty cents higher, as measured from the
neckline (near or above $6.70) to the lowest point of the pattern ($6.20), making its target
$7.20.

6D. Based on your answer in 6C, explain your forecast for the stock over the next two months
using all available evidence.
Should this stock break above $6.70, thus completing the inverse head and shoulders pattern, it
should move as high as $7.20. The possibility for a new upward trend has three strong items of
confirmation on the chart independent of the inverse head and shoulders pattern.
First the Bollinger Band shows that while the first trough pierced the 2-standard-deviation band,
the second trough, though lower, did not, thus showing that the price action may be preparing to
revert to the mean, which it did shortly thereafter, crossing the 20-day moving average
suggesting a coming trend change.
Second the MACD two-line study has made a clear crossover indicating that the stock is likely to
change trend from downward to upward. The two lines are still expanding suggesting that the
acceleration towards this change has not slowed.
Third the 14-day Average Directional Index (ADX) had turned down sharply suggesting that the
strength of the current downward trend is weakening, making way for a bullish move to begin.
With the preponderance of evidence to suggest the possibility of an upward trend, and the fact
that only a very small upward move now would complete the inverse head and shoulders pattern,
it is reasonable to forecast a bullish trend in this stock for the next two months.
(Note: the following paragraph is optional, though it sets up the answer in 6E) Should the stock
move slightly higher and clear $6.70, and should the price action move high enough to complete
the target of the inverse head and shoulders pattern, then the price would also have filled the gap
created at the breakout of the double-top pattern. The result would be that price had both filled
the gap (which may act as resistance) and if the price action moves at all higher than $7.20, it
will have then broken through the former support price left by the double top. This could suggest
that the price may maintain its upward trend long enough to challenge the former high at $7.70.
This means potential value of a coming upward trend could be substantial enough for investors
to consider.



6E. Assuming no risk from gaps, explain the dollar value at risk for your firm if they were to
purchase 50,000 shares of the stock at the last closing price of $6.61 and set a stop loss just
below a price which would invalidate the developing pattern.

Purchasing 50,000 shares of stock at $6.61 in anticipation of completing the head and shoulders
pattern, ( [Note this red text is not necessary for the answer but is hear for clarification]
based on the evidence from the other three indicators that the price action may easily
complete the pattern) would then necessitate a stop loss of $6.19, a price one cent below the
level which would negate the appearance of an inverse head and shoulders pattern (because
the $6.20 would be a price equal to the previous low and an inverse head and shoulders
pattern must make a higher low for the second shoulder).

That means the risk to in the position would amount to $21,000. (6.61 6.19 = .42 x 50,000)




Answers to Question #7: Elliott Wave

On the chart below (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 above:

7A. 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)
Wave(1) 3.05-11.00, w1 of the five sub-waves is not clear on the weekly chart. (1 Point)
Wave(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)
Wave(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)
Wave(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)


Wave(5) 15.25-37-65, W(5) is extended and w5 of W(5) is extended. (1 Point)
Wave(A) 37.65-23.35, simple 3-3-5, a-b-c down. (1 Point)
Wave(B) 23.35-29.06, simple 3-3-5, a-b-c up, retracing .382 of W(A). (1 Point)
Wave(C) 29.06- ?, incomplete five wave pattern, currently in w5 of W(C). (1 Point)

7B. Identify the type of corrective pattern following the high at 37.65 by describing its wave
structure.

Simple zig-zag correction (1 Point)


7C. What do you see as the next trading opportunity on this chart? Describe your analysis.
Include Fibonacci relationships that support your analysis.

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)


Answers to Question #8: Candlestick Analysis

You are a newly appointed consultant to an endowment fund that wants to liquidate a large
holding in their portfolio. The fund wants you to verify that the price is likely to be going up
because they want to sell into strength. You have been asked to deliver an analysis of whether
there is any evidence on the chart below to suggest that the stock is showing strength. This chart
includes candle patterns plus a momentum line, technical study below the chart area.



8A. Name four candlestick patterns in the last 25 candles which show evidence of buyer interest
in this stock

(any four of these)

1. Morning Star formation (beginning of September)
2. Bullish Separating Lines formation (around September 18)
3. Bullish engulfing formation (late September)
4. Bullish window (October, just before last three candles)
5. Three White soldiers (end of chart)

8B. Describe additional, non-candlestick evidence of bullish potential on the chart.

The momentum line shows a bullish divergence beginning in July and continuing at the start of
September. This formation is a confirming signal for the slowing of the downward trend and
the coming of a new upward move in the stock.

8C. Describe two instances anywhere on this chart that candlestick patterns coincide with non-
candlestick evidence to further support the expectation of continued buying strength in this
stock.



The morning star is confirmed by the completion of the bullish divergence on the momentum
line.

The Three White Soldiers formation occurs just at the time the stock price breaks a downward
trendline. That trendline is also be seen as the neckline of an inverse head and shoulders
pattern. The first candle of the Three White Soldiers pattern designates the breakout of the
inverse head and shoulders pattern.





Answers to Question #9: Behavioral Finance


Your portfolio manager has tasked you with identifying the advantages and disadvantages of
shortening the time-horizon for the funds investment choices to less than one year.

9A. Discuss two primary implications of a short-term horizon and why it can lead to
underperformance using examples from Montiers research.

It tends to lead to closet indexing. Montier points out that stock-option compensation for
corporate executives has encouraged them to be short-term focused and to manage the
company around the quarterly earnings cycle. Investors are keyed to shorter-term
outcomes. In one study, corporate CFO said they would be willing to forego a longer-term
profitable project if it meant a 0.20 miss in current quarter. Thus they manage short-term
for benefit of the stock price.

Managers will get fired for underperformance long before a longer-term track record
justifies their strategies. Human nature requires quick results, which often leads to poor
emotional decisions. Remote (long-term) gains are discounted at a very high rate. Take
quick profit and lock it in mentality. In one study done by Montier on 3% alpha and 6%
tracking error for high performance managers. Synthetic managers that were top quartile
for a 50 year window underperformed their benchmarks 1 in 3 years (15/50) and many
have runs of 3 to 5 years of underperformance. Very few people would be able to stick with
a manager during such a long period of underperformance. Managers tend to focus on the
short-term so they can retain clients and get paid.

Key: Montier Chapter 14


9B. Which behavioral bias leads managers to focus on short-term holding periods and what can
be done about changing that focus?


Illusion of Control, Illusion of Knowledge that managers cannot pick stocks in the short run.
Montier documents that highly educated portfolio managers tend to be very confident about
their abilities to know what the stocks are going to do. When given a significant number of
choices (stocks) to purchase, the illusion of control suggests they know what to buy and
when. The high percentage of options strategies that are implemented prior to earnings
supports this notion. Large portfolios and high turnovers suggest that managers have only
an illusion of control.

Montier also suggests that when investors are myopic, they tend to check their performance
statements frequently. The more frequently they check a statement, the more likely
they are to encounter loss positions. This can become a self-fulfilling prophecy.
Managers need to learn from these errors and not be too focused on optimizing incremental
reports so they dont twist the facts to support an illusion of knowledge.



Managers need to do a better job at extending time horizons and that means discussing, and
being prepared for the volatility of short-term returns. It requires investment professionals
to communicate clearly with clients so that they understand the professional cannot predict
the short-term swings.

Key: Montier Chapter 14, Chapter 6 limits to learning


9C. Montier explains that there are two sides of the brain and each act very differently in the
influence of investment decision making. State the two systems and discuss the key
influences of each.

System X: Reflexive, primitive emotional decision making takes place. The McCoy human
side. Intuition and gut feel drive the output. Holistic, Feels good, rapid parallel processing,
slow to change, broad generalizations, crudely integrated, vivid imagery, experience
passively and precociously, automatic, effortless.

System C: Reflective, logical deliberate effort. Deductive and computer like. The Spock
Vulcan side. Can only follow one step at a time like a serial processor. Abstract imagery,
changes with speed of thought, highly integrated. Requires justification and evidence.

(Note, the key words in this question and answer refer to table 1.1 in Montiers book)




















END of Document.