CMT Level I cheat sheet

Technical Analysis of Financial Markets

• Dow Theory rests on three premises: prices discount everything, trends persist in three phases (accumulation, public participation, distribution), and trends are confirmed by the averages; a primary trend holds until a clear reversal signal appears.

• Trend classification by duration: primary (months to years), secondary/intermediate (weeks to months, typically retracing one-third to two-thirds of the prior primary move), and minor (days to weeks).

• Support is a price zone where demand historically halts declines; resistance is a zone where supply halts advances. A broken resistance level commonly becomes support, and vice versa, because trapped participants act at the prior level.

• Trendline construction: an uptrend line connects successive higher lows and is drawn below price; a downtrend line connects successive lower highs and is drawn above price. A valid line needs at least two touch points and a third touch to confirm.

• Moving average mechanics: a simple moving average (SMA) averages the last n closes; an exponential moving average (EMA) applies weighting factor k = 2/(n+1) to the newest close. Price above a rising average indicates an uptrend; crossovers of a fast and slow average are trend-change signals.

• Oscillators are bounded and best used in ranging markets: RSI (14-period default) above 70 signals overbought and below 30 oversold; stochastic %K compares close to the high-low range over n periods, with readings above 80 and below 20 treated as extremes.

• MACD equals the 12-period EMA minus the 26-period EMA; its 9-period EMA is the signal line. MACD crossing above its signal line is bullish; the histogram measures the gap between the two lines and shows momentum acceleration or decay.

• Volume confirms price: an advance accompanied by rising volume is more reliable than one on falling volume. Divergence between price and volume, or between price and a momentum oscillator, warns that the prevailing trend is weakening.

• Classical chart patterns: head-and-shoulders is a reversal with a neckline break as the trigger; a double top or bottom is confirmed only by the intervening trough or peak being broken. Rectangles and triangles are continuation patterns resolved by a breakout, ideally on expanded volume.