CMT Level II key terms

A framework holding that markets move in three nested trends (primary, secondary, minor), that a trend persists until clearly reversed, and that index averages should confirm one another before a signal is trusted.

The broad directional movement of a market lasting from many months to several years, which Dow Theory treats as the tide that secondary reactions and minor fluctuations move against.

A countertrend pullback within a primary trend, typically lasting weeks to months and retracing roughly one-third to two-thirds of the prior advance or decline.

The requirement that two related measures, such as a broad average and a transport or sector index, move in the same direction before a trend signal is accepted as valid.

A straight line drawn through two or more successive swing lows in an uptrend or swing highs in a downtrend, used to visualize support, resistance, and the pace of a move.

A pair of parallel trendlines enclosing price action, one drawn along swing lows and the other along swing highs, which frames the normal range of a trend and flags acceleration or breakdown.

A price zone where buying interest has previously absorbed selling, causing declines to pause or reverse; its significance grows with the number of times it has held and the volume traded there.

A price zone where selling pressure has previously halted advances, marking an area where supply overwhelms demand; once broken, it often later acts as support.

The tendency for a broken support level to become resistance, and a broken resistance level to become support, as market participants anchor to prior prices.

A close beyond a defined boundary such as a trendline, chart pattern, or trading range, ideally accompanied by expanding volume and followed by a retest that holds.

A move beyond a boundary that quickly reverses back inside it, trapping breakout traders; often identified by weak volume, a fast reversal, or failure to hold on a closing basis.

A temporary countertrend move that partially offsets a prior advance or decline, commonly measured against Fibonacci ratios such as 38.2, 50, and 61.8 percent.

A tool that projects potential pullback levels by dividing a prior swing by ratios derived from the Fibonacci sequence, most commonly 23.6, 38.2, 50, 61.8, and 78.6 percent.

A price peak flanked by lower highs on both sides, used to anchor trendlines, define ranges, and measure the amplitude of a move.

A price trough flanked by higher lows on both sides, used as an anchor for uptrend lines, stop placement, and retracement measurement.

A chart formation signaling that the prevailing trend is likely to change direction, such as a head-and-shoulders top, double top, or rounding bottom, confirmed by a boundary break.

A topping pattern with three peaks, the middle highest, resting on a neckline; a decisive close below the neckline projects a target equal to the head-to-neckline height.

The support or resistance line connecting the reaction lows or highs of a reversal pattern, whose breach confirms the pattern and anchors the measured-move target.

Two roughly equal peaks separated by a trough, where the second failure to exceed the first high signals weakening demand; confirmation comes on a break of the intervening low.

A technique that projects a price target by adding the height of a pattern or prior leg to the breakout point, giving an objective estimate of the move's potential extent.

A consolidation formation, such as a flag, pennant, or triangle, that represents a pause within an existing trend and typically resolves in the direction of that trend.

A short, sloped rectangular consolidation after a sharp move, bounded by parallel lines; a breakout usually resumes the prior direction by roughly the length of the flagpole.

A converging pattern formed by a rising lower boundary and falling upper boundary, reflecting shrinking volatility; it resolves with a breakout whose direction should be respected rather than assumed.

The number of shares, contracts, or units traded in a period; rising volume on advances and falling volume on pullbacks is read as confirming trend strength.

A cumulative indicator that adds volume on up closes and subtracts it on down closes, used to gauge whether volume is flowing into or out of a market.

A disagreement between price and an indicator or related index, such as a new price high with a lower momentum reading, which warns that the prevailing move may be weakening.

A continuously updated average of closing prices over a set window, used to smooth noise, define trend direction, and generate crossover or price-versus-average signals.

A moving average that weights recent prices more heavily than older ones, so it turns faster than a simple average of the same length and hugs price more closely.

The point where a faster line crosses a slower one, such as a short moving average crossing a long one, commonly used as a mechanical trend-change signal.

Bands placed a set number of standard deviations above and below a moving average; width reflects volatility, and contractions often precede expansion and directional moves.

A bounded momentum oscillator scaled from zero to one hundred that compares average gains with average losses over a lookback period, flagging overbought and oversold conditions.

A condition in which price has risen sharply and an oscillator sits in its upper range, suggesting an extended move that may pause or pull back rather than reverse outright.

A condition in which price has fallen sharply and an oscillator sits in its lower range, suggesting selling may be stretched; in a strong downtrend it can persist for long periods.

A momentum measure computed as the percentage difference between the current price and the price a set number of periods earlier, highlighting acceleration and deceleration.

A chart that records only meaningful price changes using fixed box sizes and reversal amounts, ignoring time and volume, to clarify trend and objective price targets.

A price chart where each period shows open, high, low, and close as a body with wicks, allowing quick reading of intrabar buying and selling pressure.

A candlestick whose open and close are nearly equal, producing a tiny body; it signals indecision and carries more weight when it appears after an extended trend.

Measures of how widely a move is shared across a universe of stocks, such as advance-decline lines or the percentage above a moving average, used to test index strength.

A gauge of crowd positioning or mood, such as put-call ratios, survey bullishness, or short interest, often read contrarily at extremes.

An approach that treats unanimous optimism or pessimism as a warning sign, buying when sentiment is extremely negative and reducing exposure when it is euphoric.