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CMT Level II study materials
CMT Level II study resources

CMT Level II practice questions

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Question 1Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

In classical Dow Theory, which statement best describes the relationship between the primary trend and secondary reactions?

  1. Secondary reactions are confined to intraday price action and never last more than one trading session.
  2. Secondary reactions and the primary trend move in the same direction and differ only in duration.
  3. Secondary reactions interrupt but do not reverse the primary trend, and are typically retraced by the next primary move. Correct answer.
  4. Secondary reactions always terminate the primary trend once they exceed a 50 percent retracement.

Explanation

Dow Theory treats the primary trend as the dominant tide, with secondary reactions acting as waves against it. A secondary reaction is a meaningful counter-trend move that typically retraces one-third to two-thirds of the prior primary swing before the primary trend resumes.

Question 2Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A chart shows price making a higher high while the 14-period RSI makes a lower high. What is this configuration called and what does it conventionally suggest?

  1. A hidden divergence suggesting trend continuation upward.
  2. A bearish divergence suggesting momentum is weakening. Correct answer.
  3. A momentum confirmation suggesting the uptrend is intact.
  4. A bullish divergence suggesting momentum is strengthening.

Explanation

When price sets a higher high but the oscillator sets a lower high, the pattern is a bearish (negative) divergence. It signals that upside momentum is fading even as price advances, which raises the risk of a pullback or reversal.

Question 3Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A daily candlestick opens near its high, closes near its low, and has a small real body with almost no shadows. Which classification fits and what does it imply?

  1. A doji, implying indecision and a possible turning point.
  2. A spinning top, implying balanced supply and demand.
  3. A marubozu bearish candle, implying decisive selling pressure. Correct answer.
  4. A hammer, implying buyers rejected lower prices.

Explanation

A bearish marubozu has essentially no upper or lower shadow, with open at the high and close at the low. It reflects sellers controlling the session from open to close and is read as strong near-term selling conviction.

Question 4Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement correctly distinguishes an ascending triangle from a symmetrical triangle?

  1. The ascending triangle has a flat upper boundary and rising lower boundary, giving it a bullish bias. Correct answer.
  2. The symmetrical triangle has a flat upper boundary and a rising lower boundary.
  3. The ascending triangle has a flat lower boundary and falling upper boundary, giving it a bearish bias.
  4. The ascending triangle has both boundaries rising in parallel.

Explanation

An ascending triangle is defined by horizontal resistance and a rising support line, so buyers are pressing against a fixed ceiling. That geometry gives the pattern a bullish bias, with the breakout conventionally expected through the flat top.

Question 5Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

On a point-and-figure chart using a 1-point box with a 3-box reversal, price is in a column of X's from 40 to 46. What price confirms a reversal into a column of O's?

  1. 43 Correct answer.
  2. 44
  3. 42
  4. 45

Explanation

A 3-box reversal requires a move of three boxes against the current column, so from the 46 high the reversal threshold is 46 minus 3, which is 43. Only a print at 43 or below justifies switching to a column of O's.

Question 6Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A stock breaks above a head-and-shoulders neckline at 48.00, with the head at 60.00 and the neckline at 48.00. Using the measured-move method, what is the minimum downside...

  1. 36.00 Correct answer.
  2. 40.00
  3. 44.00
  4. 24.00

Explanation

The measured move for a head-and-shoulders top is the distance from the head to the neckline projected downward from the breakout point. Here the pattern height is 12.00, so the target is 48.00 minus 12.00, or 36.00.

Question 7Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A 20-period simple moving average is calculated on closing prices. If the newest close is much higher than the close dropping out of the window, what happens to the moving average?

  1. It rises, because the incoming price exceeds the outgoing price. Correct answer.
  2. It falls, because the window length is unchanged.
  3. It is unchanged, because the number of periods is constant.
  4. It becomes more volatile, because the divisor changes.

Explanation

In a simple moving average of fixed length, the change in the average equals the difference between the entering and exiting values divided by the period count. A higher incoming close relative to the dropped close therefore pulls the average upward.

Question 8Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which volume behavior most reliably supports the validity of an upside breakout from a long consolidation?

  1. Volume contracts sharply on the breakout bar and expands on subsequent pullbacks.
  2. Volume spikes only on the day the breakout fails.
  3. Volume expands substantially above its recent average on the breakout and on follow-through. Correct answer.
  4. Volume remains exactly at its 50-day average throughout the breakout.

Explanation

Breakouts are more trustworthy when accompanied by a clear expansion in activity, reflecting broad participation behind the move. Continued elevated volume on follow-through adds confirmation that the breakout is not a false move.

Question 9Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

In Elliott Wave theory, which rule must hold for a valid five-wave impulse sequence in a rising market?

  1. Wave 4 may overlap wave 1 price territory.
  2. Wave 2 must exceed the start of wave 1.
  3. Wave 5 must be longer than wave 3.
  4. Wave 3 is never the shortest of waves 1, 3, and 5. Correct answer.

Explanation

One of the cardinal Elliott rules is that wave 3 cannot be the shortest among the three impulse waves. This constraint, along with wave 2 not retracing beyond the origin of wave 1 and wave 4 not overlapping wave 1, defines a valid impulse.

Question 10Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A trader computes a 10-period average true range and finds it rising steadily while price consolidates sideways. What is the most reasonable interpretation?

  1. The average true range is signaling an imminent trend reversal to the downside only.
  2. Intraday range expansion is occurring despite the lack of net price progress, so breakout risk is elevated. Correct answer.
  3. The consolidation is contracting, so a breakout is unlikely.
  4. The trend is strengthening because volatility and direction always align.

Explanation

Average true range measures absolute movement regardless of direction, so a rising ATR during sideways price action means daily ranges are widening. That condition often precedes or accompanies a directional breakout, though the ATR itself does not specify direction.

Question 11Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement correctly describes the interpretation of a stochastic oscillator reading above 80 that begins to turn down?

  1. The security is oversold and a buy signal is generated.
  2. The security has been overbought and the downturn may signal weakening momentum. Correct answer.
  3. The reading is invalid because stochastics cannot exceed 80.
  4. The oscillator is confirming a new uptrend.

Explanation

Stochastic readings above 80 place the close near the top of the recent range, which is conventionally labeled overbought. A turn down from that zone suggests upward momentum is fading, though in strong trends the oscillator can remain elevated for extended periods.

Question 12Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A relative strength line comparing a sector index to a broad market index is falling while both indices are rising. What does this indicate?

  1. The sector is underperforming the market even though it is advancing. Correct answer.
  2. The relative strength line is miscalculated because both indices rose.
  3. The sector is declining in absolute terms.
  4. The sector is outperforming the market but losing momentum relative to it.

Explanation

A relative strength line measures the ratio of the sector to the benchmark, so a falling line means the sector is gaining less than the market. Absolute gains can coexist with relative underperformance, which is a common source of confusion.

Question 13Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which of the following best characterizes the use of sentiment indicators such as the put/call ratio in technical analysis?

  1. They are used as trend-following indicators that confirm price direction.
  2. They are used to measure the bid-ask spread of the options market.
  3. They are used as contrarian indicators, where extreme readings suggest crowded positioning. Correct answer.
  4. They are used to compute intrinsic value of the underlying.

Explanation

Sentiment measures such as the put/call ratio are typically read contrarian, since extreme pessimism or optimism can indicate crowded one-sided positioning. Very high put/call ratios are often associated with excessive fear and potential bottoms, though timing signals are imprecise.

Question 14Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A bullish engulfing pattern appears at the end of an extended downtrend. Which description matches the pattern?

  1. Two consecutive doji separated by a gap.
  2. A small white real body contained entirely within the prior black real body.
  3. A white real body that completely covers the prior black real body. Correct answer.
  4. A black real body that completely covers the prior white real body.

Explanation

A bullish engulfing consists of a white candle whose real body fully encompasses the preceding black candle's body, appearing after a decline. It reflects a shift from seller control to buyer control within the session and is read as a potential reversal signal.

Question 15Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A 12-period exponential moving average uses a smoothing multiplier of 2/(12+1). If the prior EMA is 50.00 and the current close is 63.00, what is the updated EMA?

  1. 56.00
  2. 53.00
  3. 51.00
  4. 52.00 Correct answer.

Explanation

The EMA update is prior EMA plus the multiplier times the difference between close and prior EMA. The multiplier is 2/13, about 0.1538, and 13.00 times that equals 2.00, giving 52.00.

Question 16Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A market makes a series of lower highs and lower lows on the daily chart while the weekly chart shows higher highs and higher lows. How should a technically disciplined analyst reconcile this?

  1. The weekly chart should be ignored because it lags too much to be useful.
  2. The daily downtrend overrides the weekly uptrend because shorter timeframes are more precise.
  3. The weekly trend defines the dominant direction, and the daily weakness is a counter-trend pullback within it. Correct answer.
  4. The two signals cancel out, so no trend assessment is possible.

Explanation

Multi-timeframe analysis assigns greater weight to the longer timeframe, which defines the primary trend. A daily downtrend inside a weekly uptrend is normally treated as a counter-trend correction until the weekly structure itself deteriorates.

Question 17Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which condition is required for a valid measuring gap (runaway gap) interpretation?

  1. It appears after the trend is underway and remains unfilled, often marking the midpoint of the move. Correct answer.
  2. It must appear exactly at a prior support level.
  3. It occurs on unusually low volume at the very start of a new trend.
  4. It occurs at the exhaustion of a trend and is quickly filled.

Explanation

A measuring or runaway gap occurs after a trend has begun, typically on strong volume, and often appears near the midpoint of the move. Its tendency to remain unfilled supports using the gap as a rough projection tool.

Question 18Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

An ADX line is at 14 and rising, while the +DI line is above the -DI line. What is the conventional reading?

  1. The market is range-bound and likely to stay so.
  2. A trend is weak but beginning to develop, with directional bias to the upside. Correct answer.
  3. A downtrend is accelerating.
  4. A strong established uptrend is already in place.

Explanation

ADX measures trend strength without regard to direction, and readings below roughly 20 indicate a weak or absent trend. A rising ADX with +DI above -DI suggests a nascent uptrend gaining strength.

Question 19Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which of the following is the most defensible criticism of relying solely on a single oscillator to time entries?

  1. Oscillators are only valid for fixed-income markets.
  2. Oscillators cannot be calculated on daily data.
  3. Oscillators always lead price by exactly one bar.
  4. Oscillators can remain overbought or oversold for long stretches during strong trends. Correct answer.

Explanation

Bounded oscillators frequently stay in extreme zones while a powerful trend persists, so mechanical reversal trades against the trend can fail repeatedly. Prudent practice combines oscillators with trend and price-structure context.

Question 20Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

In a Wyckoff accumulation schematic, which phase follows the spring and precedes the markup?

  1. The sign of strength and last point of support testing. Correct answer.
  2. The markdown phase.
  3. The distribution phase.
  4. The selling climax.

Explanation

After a spring shakes out weak holders, the composite operator tests supply, producing a sign of strength and a last point of support. Successful tests confirm accumulation and set the stage for the markup phase.

Question 21Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A stock forms a rounded base over several months with volume that is heaviest at the left side, dries up at the low, and expands again on the right side. Which interpretation is most consistent with technical principles?

  1. The pattern is a distribution top because volume was heavy early.
  2. Volume behavior is irrelevant to rounded-base interpretation.
  3. The pattern is a bearish flag because volume expanded on the right.
  4. The pattern reflects gradual accumulation, with supply absorbed and demand returning. Correct answer.

Explanation

A rounding base with drying volume at the low and re-expansion on the right side is the classic accumulation signature. Heavy early volume reflects capitulation selling, while quiet lows show supply exhaustion and rising right-side volume shows renewed demand.

Question 22Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement about Fibonacci retracement levels is most technically sound?

  1. Retracement levels are potential reaction zones whose significance increases when they coincide with other support or resistance. Correct answer.
  2. Fibonacci levels only apply to intraday charts.
  3. The 0.382 level has no conventional use in technical analysis.
  4. The 0.618 retracement is a guaranteed reversal point.

Explanation

Fibonacci retracements identify potential reaction areas rather than certain turning points, and confluence with prior structure strengthens them. Traders treat them as zones of interest to be confirmed by price action and volume.

Question 23Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A trader observes that the 50-day moving average has crossed below the 200-day moving average after an extended advance. What is the conventional name and implication?

  1. A golden cross, implying a bullish trend change.
  2. A bullish engulfing, implying a one-day reversal.
  3. A breakout, implying a continuation of the advance.
  4. A death cross, implying a bearish trend change. Correct answer.

Explanation

When a shorter moving average crosses beneath a longer one, the event is termed a death cross and is read as a bearish trend signal. Because moving averages lag, the signal typically arrives after the price peak and should be weighed with other evidence.

Question 24Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A market index closes at a new 52-week high, but the number of stocks making new 52-week highs has been declining for months. What does this divergence most likely suggest?

  1. Broad participation is confirming the advance.
  2. Breadth measures are irrelevant at new index highs.
  3. Narrowing breadth is warning that the advance may be fragile. Correct answer.
  4. The index calculation is incorrect.

Explanation

A new index high accompanied by shrinking new-high breadth indicates fewer stocks are participating, which is a classic negative breadth divergence. Such narrowing often precedes a loss of index momentum, though it is not a precise timing tool.

Question 25Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which description correctly matches a bearish flag pattern and its customary measured target?

  1. A brief upward-sloping consolidation after a sharp decline, with the target equal to the flagpole height projected downward from the breakdown. Correct answer.
  2. A brief downward-sloping consolidation after a sharp advance, with the target equal to the flagpole projected upward.
  3. A triangle with a flat top and rising bottom.
  4. A long-term rounded top with no measurable projection.

Explanation

A bearish flag is a short, upward-tilted consolidation following a steep decline, representing a pause rather than a reversal. The measured move projects the length of the preceding flagpole downward from the breakdown point.

Question 26Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A technician compares the 14-period RSI on a weekly chart with the same indicator on the daily chart. The weekly RSI is 62 and rising while the daily RSI is 41 and falling. Which interpretation is most consistent with standard multiple-timeframe practice?

  1. The dominant uptrend remains intact and the daily pullback is a counter-trend move within it Correct answer.
  2. The weekly reading is stale and should be disregarded in favor of the daily reading
  3. Both readings should be averaged to produce a single composite momentum value
  4. A confirmed trend reversal is underway because the daily reading is below 50

Explanation

Multiple-timeframe analysis treats the higher timeframe as the trend-defining context and the lower timeframe as the timing instrument. A rising weekly RSI above 50 with a falling daily RSI below 50 describes a pullback inside an uptrend, which is a routine continuation setup rather than a reversal.

Question 27Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which point-and-figure chart setting produces a chart that is more sensitive to short-term price movement?

  1. A larger box size combined with a larger reversal count
  2. A smaller box size combined with a larger reversal count
  3. A larger box size combined with a smaller reversal count
  4. A smaller box size combined with a smaller reversal count Correct answer.

Explanation

Point-and-figure sensitivity is governed by both parameters: smaller boxes record smaller price increments, and a smaller reversal requirement allows a new column to form after a shorter counter-move. Reducing both produces more columns and faster signal generation.

Question 28Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A market has traded in a narrowing range for six weeks, and Bollinger Bands have contracted to their narrowest width in a year. Which reading is most appropriate?

  1. A low-volatility squeeze that historically precedes an expansion in range, with direction unconfirmed until a close outside the bands Correct answer.
  2. A signal that the bands have ceased to carry information
  3. A completed topping formation that implies an imminent decline
  4. A guaranteed breakout in the direction of the prior trend

Explanation

Band width measures volatility, and unusually narrow bands identify a squeeze condition in which volatility is compressed. The squeeze indicates that expansion is likely but says nothing definitive about direction, so confirmation requires a close beyond the band or a break of the range.

Question 29Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

In a bullish butterfly harmonic pattern, which relationship correctly describes point D?

  1. D is exactly equal to point B in price
  2. D is a 161.8% extension of the BC leg and lies beyond point A
  3. D is a 38.2% retracement of the CD leg only
  4. D is a 78.6% retracement of the XA leg and lies beyond point C Correct answer.

Explanation

The butterfly is defined by an extended D point that overshoots the starting point X and terminates near the 78.6% retracement of XA. The pattern is classically a reversal structure, so the terminal point sits outside the initial leg rather than inside it.

Question 30Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A trader applies a 5-period simple moving average and a 20-period simple moving average to the same price series. Which statement describes the expected behavior of these two averages?

  1. The 5-period average will lag price turning points less than the 20-period average Correct answer.
  2. Both averages will turn at exactly the same bar because they use the same data
  3. The 20-period average will cross the price more often than the 5-period average
  4. The 20-period average will be more responsive to a single large closing price

Explanation

Shorter moving averages weight recent data more heavily and therefore respond faster, turning closer to actual price turning points. Longer averages smooth more and lag further behind, which is the trade-off between responsiveness and noise suppression.

Question 31Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A daily chart shows price making a higher high while the cumulative on-balance volume line makes a lower high over the same swing. What does this divergence most directly suggest?

  1. The on-balance volume calculation is invalid for this security
  2. Buying pressure behind the advance is weakening relative to the prior swing Correct answer.
  3. Volume is confirming the advance and the divergence can be ignored
  4. Price will immediately reverse on the next bar

Explanation

On-balance volume accumulates volume with a sign based on the close-to-close direction, so a lower high in the indicator against a higher price high indicates less net volume support on the newer advance. Divergence is a warning about participation, not a timing trigger.

Question 32Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement best describes the construction of the Commodity Channel Index?

  1. It is the average of the true range divided by the closing price
  2. It divides the difference between price and its moving average by mean absolute deviation, scaled by a constant Correct answer.
  3. It is the percentage difference between two moving averages of the close
  4. It is the ratio of average gain to average loss over the lookback window

Explanation

The CCI measures the deviation of a typical price from its simple moving average, normalized by the mean absolute deviation of that typical price. The constant 0.015 scales the result so that most readings fall within roughly plus or minus 100.

Question 33Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A stock rallies from 40 to 60, then retraces to 52 before resuming higher. Which Fibonacci retracement level of the 40 to 60 advance did the pullback most nearly reach?

  1. 38.2%
  2. 78.6%
  3. 23.6%
  4. 61.8% Correct answer.

Explanation

The retracement is measured against the 20-point advance: a decline of 8 points from 60 equals 40% of the range, which is closest to the 38.2% level. The 61.8% level would sit near 47.64, well below the observed low.

Question 34Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A technician notes that the put/call ratio has fallen to a multi-year low while the index is making new highs. Which interpretation is most defensible?

  1. Sentiment is euphoric and the market is vulnerable to a sharp reversal Correct answer.
  2. The ratio has no bearing on market conditions because options data are noisy
  3. The ratio confirms that hedging demand is rising among institutions
  4. Sentiment is excessively bearish and a contrarian buy signal is present

Explanation

A low put/call ratio means call activity dominates, which is conventionally read as complacency or optimism. Contrarian sentiment analysis treats extremes of optimism as conditions that raise vulnerability to disappointment.

Question 35Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement correctly distinguishes a symmetrical triangle from an ascending triangle?

  1. An ascending triangle has a flat upper boundary and a rising lower boundary Correct answer.
  2. A symmetrical triangle has a flat upper boundary and a rising lower boundary
  3. A symmetrical triangle always breaks out downward
  4. Both patterns require a flat lower boundary

Explanation

An ascending triangle is defined by a horizontal resistance line and a rising support line, reflecting buyers stepping up while sellers defend a fixed level. A symmetrical triangle has both boundaries converging with neither being horizontal.

Question 36Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A security's 14-period average directional index has risen from 12 to 31 over several weeks while price advances steadily. What does this change in the ADX most directly indicate?

  1. The security has become more volatile in absolute terms
  2. A reversal is imminent because the ADX has exceeded 30
  3. The trend has strengthened, though the ADX does not by itself identify direction Correct answer.
  4. The trend has weakened and a range-bound market is developing

Explanation

The ADX measures trend strength regardless of direction, and a rise from low levels toward 30 or above indicates a maturing directional move. Direction must be read from the DI lines or price structure, not from the ADX itself.

Question 37Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

In Wyckoff analysis, which event typically marks the transition from Phase C to Phase D of an accumulation schematic?

  1. The upthrust after distribution
  2. The secondary test of the low
  3. The sign of strength advance and its backup Correct answer.
  4. The preliminary support and selling climax

Explanation

After the spring in Phase C, Phase D is defined by a sign of strength in which price advances on expanding volume and then backs up on lighter volume to confirm the new support. This establishes the cause for the subsequent markup.

Question 38Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A market has been declining for months, and the 20-day rate of change has reached minus 18 while price is still making lower lows. Which reading follows standard oscillator logic?

  1. The reading is overbought and a decline should follow
  2. The reading is deeply oversold and warns that downside momentum is stretched Correct answer.
  3. The reading confirms that selling pressure is accelerating without limit
  4. The reading should be ignored because rate of change has no bounded range

Explanation

Rate of change is unbounded but its historical extremes are meaningful for a given market, so a reading far below zero indicates momentum has become stretched to the downside. Oversold conditions warn of vulnerability to a bounce but do not guarantee one.

Question 39Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which condition best supports treating a gap as a breakaway gap rather than a common gap?

  1. The gap is filled within two sessions on rising volume
  2. The gap occurs inside a well-defined trading range on light volume
  3. The gap occurs as price exits a consolidation on unusually heavy volume and remains unfilled Correct answer.
  4. The gap occurs after an extended trend on declining volume

Explanation

A breakaway gap accompanies the initial departure from a congestion area and is validated by heavy volume and by remaining unfilled. Filling quickly would instead characterize an exhaustion or common gap.

Question 40Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A chart shows a long downtrend followed by a session in which the real body is small and sits entirely above the prior session's real body, with both shadows short. Which candlestick pattern is this?

  1. Dark cloud cover
  2. Morning star
  3. Bullish harami Correct answer.
  4. Bearish harami

Explanation

A harami consists of a small real body contained within the range of the preceding, larger body; when the small body sits above a large down body it is a bullish harami. It signals a contraction of downside momentum rather than a confirmed reversal.

Question 41Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A market is in a confirmed long-term uptrend, and the 14-period stochastic has just crossed up from below 20. Which use of this signal is most consistent with technical practice?

  1. Treat it as a primary reversal signal and exit all long positions
  2. Treat it as a timing trigger to add to longs in the direction of the larger trend Correct answer.
  3. Treat it as proof that the trend has changed to downward
  4. Treat it as meaningless because the stochastic is range-bound

Explanation

Oscillators are most useful as timing tools when their signals align with the direction of the dominant trend. A bullish crossover from oversold within an uptrend supports entering or adding in the trend direction rather than calling a reversal.

Question 42Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement best describes the construction of the Keltner channel?

  1. It uses a simple moving average with bands set at a fixed percentage of price
  2. It uses a moving average of typical price with bands set at a multiple of average true range Correct answer.
  3. It uses a median price with bands set at a multiple of the standard deviation of volume
  4. It uses a linear regression line with bands set at two standard deviations

Explanation

Keltner channels center on an exponential or simple moving average of typical price and place the bands at a multiple of average true range. Using ATR makes the channel width adapt to volatility in a way that percentage or standard-deviation bands do not.

Question 43Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A stock completes a large head-and-shoulders top and then retests the neckline from below before turning lower again. Which reading of the retest is most standard?

  1. The retest invalidates the pattern because price touched the neckline
  2. The retest confirms the pattern and offers a lower-risk entry for a short position Correct answer.
  3. The retest proves the pattern is a continuation formation
  4. The retest eliminates the need for any stop-loss protection

Explanation

A pullback to the broken neckline that fails to reclaim it is a classic throwback that confirms the break and provides a defined risk point above the neckline. It strengthens rather than weakens the bearish case.

Question 44Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement best describes how the relative strength index handles a series of large gains followed by a single large loss?

  1. The loss reduces the average gain and raises the average loss, lowering the RSI gradually Correct answer.
  2. The RSI immediately falls to zero
  3. The loss is weighted far more heavily than the gains because of the averaging method
  4. The RSI becomes undefined because gains and losses are not equal

Explanation

The RSI uses smoothed averages of gains and losses, so a single large loss raises the average loss and slightly lowers the average gain, producing a measured decline in the reading. It takes a sustained pattern of losses to drive the RSI to an extreme.

Question 45Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A trader observes that a market has made three successively lower peaks on the daily chart, each accompanied by a lower reading on the 21-period moving average convergence divergence histogram. Which conclusion is best supported?

  1. The market is oversold and a durable bottom has formed
  2. Downside momentum is building and rallies are meeting increasing supply Correct answer.
  3. The pattern guarantees a decline of a specific measured size
  4. The indicator is lagging and should be replaced by price alone

Explanation

Successive lower price peaks with lower momentum peaks indicate that each rally is generating less upward force, a sign of persistent supply. Momentum divergence of this kind supports the bearish case but does not specify a price target.

Question 46Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement correctly describes the interpretation of a rising Arms index (TRIN) value above 1.0 on a given day?

  1. The index is measuring the ratio of new highs to new lows
  2. The market is overbought and a reversal is certain
  3. Advancing volume is dominating advancing issues, indicating strong demand
  4. Declining volume is heavy relative to the number of declining issues, indicating selling pressure Correct answer.

Explanation

The TRIN divides the ratio of advancing to declining issues by the ratio of advancing to declining volume. A value above 1.0 means volume is skewed toward declining issues more than the issue count alone would suggest, which reflects heavy selling pressure.

Question 47Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A stock has broken above a resistance level and then pulled back to that level on declining volume before turning higher. Which description best fits this action?

  1. A distribution pattern indicating institutional selling
  2. An exhaustion gap that will be filled
  3. A throwback following a valid breakout, with the level now acting as support Correct answer.
  4. A failed breakout that should be traded as a reversal

Explanation

Prior resistance frequently becomes support after a breakout, and a pullback on declining volume that holds the level is consistent with a successful retest. The light volume on the pullback distinguishes it from distribution.

Question 48Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement best explains why a technician might prefer a logarithmic price scale when analyzing a market that has risen from 5 to 500 over two decades?

  1. Logarithmic scales eliminate the need to adjust for stock splits
  2. Logarithmic scales display equal percentage changes as equal vertical distances Correct answer.
  3. Logarithmic scales make short-term noise invisible
  4. Logarithmic scales always place trendlines at more accurate angles than arithmetic scales

Explanation

On a logarithmic scale, equal vertical distances correspond to equal percentage changes, which keeps the visual weight of moves comparable across a wide price range. Arithmetic scales compress early percentage moves and exaggerate later ones.

Question 49Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

A technician is evaluating a market where price has held within a two-point range for several weeks while the average true range has fallen to a multi-month low. Which interpretation is most consistent with volatility analysis?

  1. The low reading signals an immediate breakdown
  2. Average true range cannot be applied to range-bound markets
  3. The low reading confirms that the range will persist indefinitely
  4. Contraction in range and volatility often precedes an expansionary move, though direction remains open Correct answer.

Explanation

Volatility tends to cycle between contraction and expansion, so a compressed average true range identifies conditions that historically resolve into a larger directional move. The indicator describes the likelihood of expansion, not its direction.

Question 50Technical Analysis of Financial Markets (CMT Level II curriculum scope not enumerated in source)

Which statement correctly describes the role of a confirming indicator in a technical trading system?

  1. It must be perfectly correlated with the primary signal to be useful
  2. It should provide independent evidence so that agreement raises confidence beyond a single signal Correct answer.
  3. It replaces the primary indicator once the two disagree
  4. It guarantees that the primary signal will be profitable

Explanation

A confirmation tool is valuable when it draws on different information than the primary signal, such as volume or breadth confirming a price breakout. Independence is what makes agreement meaningful rather than redundant.