CMT Level II cheat sheet

Technical Analysis of Financial Markets (CMT Level II)

• Trend classification rule: an uptrend requires successive higher highs and higher lows; a downtrend requires successive lower highs and lower lows; violation of the prior swing low (or high) marks the trend as broken.

• Dow Theory three-phase structure: accumulation/distribution phase, public participation (trend-following) phase, and excess/panic phase; confirmation requires both averages (or index composites) to signal together.

• Moving average crossover rule: a price above its 200-period MA with the MA rising is a long-term bullish filter; the 50/200 crossover (golden/death cross) is a lagging confirmation, not a leading signal.

• Bollinger Band rule: bands are k standard deviations of a moving average; a squeeze (narrow bandwidth) signals low volatility and precedes expansion, while a close outside the band alone is not a reversal signal.

• RSI (Wilder, 14-period default) is bounded 0-100; readings above 70 are overbought and below 30 oversold, and bearish/bullish divergence between price and RSI is a momentum warning, not a timing trigger.

• MACD formula: MACD line = 12-period EMA minus 26-period EMA; signal line = 9-period EMA of MACD; histogram = MACD line minus signal line; zero-line cross reflects trend, signal-line cross reflects momentum.

• Fibonacci retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6% of a prior swing; confluence with prior support/resistance or a moving average increases the probability of a reaction.

• Volume confirmation rule: a breakout is more reliable when volume expands above its recent average; price advance on declining volume is a warning of weakening demand (volume precedes price).

• Relative strength (not RSI): ratio line = security price divided by benchmark price; a rising ratio line means the security is outperforming the benchmark regardless of absolute direction.