M6 — CM-EIP: Securities, CIS (EIP) and Foreign Exchange
Technical & Quantitative Analysis
Chapter 11 has two halves. Technical analysis reads price and volume to judge trend and timing: Dow theory, chart types and candlesticks, trend lines, support and resistance, reversal and continuation patterns, gaps, and indicators such as moving averages, MACD, RSI, the stochastic oscillator and Bollinger Bands. Quantitative analysis supplies the statistics behind risk and return: means, standard deviation, the normal distribution, skewness and kurtosis, correlation, regression, beta and expected value. The exam asks you to compute these quickly and to spot the classic slips: 1/n instead of 2/(n + 1), n instead of n - 1, one tail instead of two, correlation instead of beta.
9 sections·~5 min read
✓Checked against the IBF CM-EIP syllabus chapter 11 (checked 13 Sep 2026); standard technical analysis definitions (Dow theory, Wilder RSI, Appel MACD, Lane stochastic, Bollinger Bands) and standard statistical formulas; NIST/SEMATECH e-Handbook of Statistical Methods 1.3.5.11 (skewness and kurtosis) and MAS MoneySense Managing investment risk (correlation and diversification), checked 13 Sep 2026. Unofficial prep, not endorsed by MAS or IBF.
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Must-know for the exam
✓Three premises of technical analysis: market action discounts everything; prices move in trends; history tends to repeat. The weak-form efficient market hypothesis says past prices and volume are already in the price, so chart rules cannot consistently beat the market.
✓Dow theory: primary trend (a year or more), secondary reaction (3 weeks to 3 months, retracing 1/3 to 2/3), minor trend (under 3 weeks). Bull phases: accumulation, public participation, distribution. The Industrial and Transportation averages must confirm; volume confirms the trend.
✓Candlestick body = open to close; shadows = extremes beyond the body. Doji: open equals close. Hammer (after a fall) and hanging man (after a rise) share one shape: small body on top, long lower shadow. Shooting star: long upper shadow after a rise.
✓Role reversal: broken resistance becomes support; broken support becomes resistance. Watched retracements: one-third, 50%, two-thirds of the prior move.
✓Head-and-shoulders target = neckline minus (head - neckline); inverse = neckline plus (neckline - head). Double top target = trough minus (peak - trough). Flag target = breakout plus flagpole height.
✓Reversal patterns: head and shoulders, double and triple tops and bottoms. Continuation patterns: triangles, flags, pennants. Ascending triangle bullish, descending bearish, symmetrical neutral.
✓Gaps: common (inside a range, filled fast), breakaway (leaves a pattern, heavy volume), runaway or measuring (mid-move), exhaustion (end of a move, filled fast).
✓SMA = sum of n closes / n. EMA today = EMA yesterday + k x (close - EMA yesterday), with k = 2/(n + 1). Golden cross: 50-day MA crosses above 200-day MA; death cross: crosses below.
✓MACD = 12-period EMA - 26-period EMA; signal line = 9-period EMA of MACD; histogram = MACD - signal.
✓RSI = 100 - 100/(1 + RS), RS = average gain / average loss (usually 14 periods). Above 70 overbought, below 30 oversold. Stochastic %K = (close - lowest low) / (highest high - lowest low) x 100; 80 and 20 are the usual levels.
✓Bollinger Bands = 20-period SMA plus and minus 2 standard deviations. Narrow bands mean low volatility, not a direction. ROC = (close - close n periods ago) / close n periods ago x 100.
✓Population variance divides by N; sample variance divides by n - 1. Standard deviation is the square root and is in the same units as the data. Geometric mean is at or below arithmetic mean.
✓Normal distribution: about 68% within 1 SD, 95% within 2 SD, 99.7% within 3 SD. Positive skew = long right tail; negative skew = long left tail; high kurtosis = fat tails.
✓Correlation = Cov(A, B) / (SD A x SD B), between -1 and +1; R squared = correlation squared. Beta = Cov(share, market) / Var(market) = correlation x SD share / SD market. Expected value = sum of probability x outcome.
Technical versus fundamental analysis
•Examiners test whether you can tell which school a method belongs to. Fundamental analysis estimates what a share is worth from the economy, industry and company accounts. Technical analysis studies market action, mainly price and volume, to judge trend direction and timing.
•Premise 1: market action discounts everything. Anything that affects value is already reflected in price.
•Premise 2: prices move in trends, and a trend in force tends to continue.
•Premise 3: history tends to repeat, because patterns reflect recurring crowd psychology such as fear and greed.
•The main critique is the weak-form efficient market hypothesis: if current prices already reflect all past prices and volume, trading rules built on charts cannot consistently earn risk-adjusted excess returns. The semi-strong form extends this to all public information, which also defeats fundamental analysis; the strong form covers inside information too.
•Trap: a method that uses numbers is not automatically technical. Discounting dividends or projecting earnings is fundamental.
•Takeaway: fundamentals ask what to buy; technicals ask when. Weak-form efficiency is the direct challenge to charting.
Dow theory
•Dow theory is the base of modern trend analysis. Learn its tenets as a list, because examiners combine them into statement questions.
•Three trends: primary (the main tide, a year or more), secondary reactions (about 3 weeks to 3 months, retracing one-third to two-thirds of the primary move), minor trends (under about 3 weeks).
→Candidates pick the dividend-discount idea, which belongs to fundamental analysis, not charting.
→Using numbers does not make an approach technical; the test is whether it studies company value or market price action.
→The weak form is the direct critique of technical analysis; the semi-strong and strong forms are what rule out gains from fundamental analysis and inside information.
→The premise is about repeated investor behaviour, not about repeated corporate or policy events.
→The distribution phase is part of a primary trend, not a separate trend in its own right.
→Candidates confuse the secondary reaction with the minor trend, which is the short, noise-like movement.
→Distribution comes last in a bull market; it is informed selling into public enthusiasm.
→A non-confirmation withholds a buy signal; it does not by itself produce a sell signal.
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•Three phases of a primary bull market: accumulation (informed buying on bad news), public participation (trend followers join), distribution (informed selling to a late public).
•The averages must confirm: a signal needs both the Industrial and the Transportation (originally Rail) averages to make new highs, or new lows.
•Volume must confirm the trend: it expands on moves in the direction of the primary trend.
•A trend is assumed to continue until it gives definite signals of reversal. Closing prices are used.
•Trap: a non-confirmation (one average makes a new high, the other does not) withholds a buy signal. It is not by itself a bear-market signal. Minor trends are the least reliable, not the most.
•Takeaway: three trends, three phases, averages confirm, volume confirms, trend persists until reversed.
CMFASPrep