Technical Analysis of Financial Markets
The Technical Analysis of Financial Markets domain is the backbone of CMT Level I. It tests whether you can define, construct, and interpret the tools practitioners use to describe price behavior - trend structure, chart types, classical patterns, indicators, volume, sentiment and breadth - and whether you can reason with them rather than merely recognize their names. Expect definitional recall mixed with short applied scenarios.
Dow Theory and Trend Structure
Dow Theory holds that the averages discount everything, that three trend horizons exist (primary, secondary, minor), that a primary trend passes through accumulation, public participation and distribution, that the averages must confirm one another, and that a trend persists until a definitive reversal signal appears; volume should confirm price. Operationally, an uptrend is a sequence of higher highs and higher lows - a single lower low is a warning, not a reversal.
Charting and Price Patterns
Bar, candlestick and point-and-figure charts encode the same data differently: point-and-figure ignores time and volume entirely and filters small moves using box size and reversal criteria. Support and resistance are zones, not precise lines, and the polarity principle says broken resistance tends to become support. Breakouts are judged by volume expansion and a decisive close beyond the level, not by an intraday poke through it.
Indicators
Moving averages are lagging and trend-following; RSI, MACD and stochastics are oscillators that are leading or coincident and bounded. Bollinger Bands (20-period SMA plus/minus two standard deviations) describe volatility: a squeeze precedes expansion, while a tag of the upper band inside an uptrend signals strength, not an automatic sell.
Worked example
A stock closes 48, 50, 51, 49, 52. The 5-day SMA is 250/5 = 50, so price sits above a rising average - trend intact. The next close is 47: the new SMA is (50+51+49+52+47)/5 = 49.8. The average has slipped only 0.2 while price fell 5; that difference is the lag. Price closing below a flattening average, combined with a lower high on lighter volume, is a caution signal; a subsequent lower low completes the evidence for a trend change.
Traps that cost marks
Overbought is not a sell signal in a powerful uptrend. Divergence without price confirmation is incomplete. Applying volume rules to point-and-figure charts is meaningless. Naming a pattern in hindsight, ignoring log scale over long horizons, or confusing a lagging trend tool with a leading oscillator all produce wrong answers.