2.3 Markets, Instruments, Data, and the Technician

A technician does not chart "the market" in the abstract. A technician charts a specific instrument on a specific asset, built from data that can mislead if you do not know how the series was handled. This unit is the Level I inventory: four asset classes that TA can be applied to, five instruments you are likely to trade or analyze, the market conditions that make TA applicable, and the data problems that ruin otherwise pretty charts.

Four asset classes amenable to technical analysis

TA is not an equities-only craft. The Program Guide asks you to name four asset classes that are amenable to technical analysis when they trade with public prices and enough activity to form a series:

Later CMT units treat indexes, ETPs, options, and digital assets in more depth. This unit's asset-class list is the four-market foundation: stocks, bonds, currencies, commodities. If a question asks for asset classes, do not answer with "calls, puts, and futures" — those are instruments, not asset classes. If it asks for instruments, do not answer with "equities and commodities" alone.

Currencies in this unit means FX as an asset class. Digital-asset markets can also be charted when they are liquid and public, but they have their own later section. Do not expand the four-class list into a fifth class unless the question is clearly about crypto as an instrument or a later unit.

Five tradable instruments a technician is likely to employ

The same wheat, the same equity index, or the same currency pair can be expressed several ways. Level I wants five instrument types:

1. Cash (spot) — the price to buy or sell the asset for near-immediate delivery. Listed shares, many bonds, and FX spot are cash/spot markets.
2. Futures — standardized contracts to buy or sell at a future date, marked to market, with open interest as well as volume.
3. Options — contracts that grant the right but not the obligation to buy or sell at a strike, for a premium. Implied volatility lives here.
4. Indexes — mathematical averages or composites of a basket. They are not always cash-tradable by themselves, but they are the technician's map (Dow averages, S&P 500, sector indexes).
5. Exchange-traded products (ETPs) — baskets that trade like shares, including exchange-traded funds (ETFs) and exchange-traded notes (ETNs). They let a technician express an index, a commodity, or a theme in a brokerage account.

A working technician might chart the S&P 500 index, trade an E-mini futures contract, hedge with options, and overlay an ETF — four instruments, one asset class (equities). The exam will separate those layers. Indexes belong on the instrument list even when you cannot "buy the index" except through a derivative or ETP, because so much technical work is done on the calculated series itself.

Necessary characteristics of a market for TA to apply

Technical analysis needs a market, not a private appraisal. The usual necessary characteristics are:

• Liquidity. Orders can be executed without moving price so far that the chart you just read is no longer the chart you can trade.
• Continuous or frequent pricing. TA reads a time series. A market that prints once a month after unpublished negotiation is a poor TA candidate.
• Public data. High, low, close, and volume (or a close substitute such as open interest on some futures) must be available to more than one insider. Secret dealer pads are not a chart.
• Standardized terms. Contract size, tick size, session hours, and delivery rules must be knowable so two observers can draw the same bar.
• Competitive price discovery. If an administered ceiling never moves, there is nothing for trend-following to detect. Heavily pegged or halted markets limit TA.
• Sufficient history. Patterns, moving averages, and volatility measures need a sample. A brand-new listing can be charted, but inferences are fragile.
• Identifiable timestamps and sessions. Someone must define when a "day" begins and ends, especially in 24-hour FX and electronic futures.

When those conditions fail — illiquid pink sheets, one-way government prices, missing volume — the honest Level I answer is that TA applies poorly or not at all, even if someone has drawn a line on a spreadsheet. Liquidity without public prints, or public prints without liquidity, each breaks a different part of the craft: you cannot trust the history, or you cannot transact the conclusion.

Dow Theory's emphasis on the close already assumed a market with a published daily settlement. FX and some futures require you to declare which close you mean. That is a market-structure issue, not a reason to abandon TA, provided the convention is consistent.

Data-handling issues

Even a liquid, public market can feed you a false series. The unit's last learning objective is to describe data-handling issues. Treat the following as a working list, not optional fine print.

Splits, reverse splits, and dividends

A 2-for-1 split halves the listed price overnight. An unadjusted chart shows a crash that never happened as a change in enterprise value. Technicians usually study split-adjusted prices so trend and percentage tools remain consistent, while still knowing the unadjusted print when corporate-action gaps themselves matter. Dividends, especially special or large cash distributions, also gap price series. Decide whether you are looking at a price chart or a total-return series; mixing them mid-study is a data error, not a new pattern.

Corporate actions beyond the dividend

Mergers, spin-offs, symbol changes, bankruptcies, and share-class conversions can break a series or splice two different companies under one ticker. Always ask: is this the same economic entity I think it is? An industrial average that quietly replaced a constituent is a related issue at index level.

Survivorship bias

If you backtest "all NYSE stocks" using only the names that still trade, you have deleted the failures. Survivorship bias overstates average returns and understates drawdowns. Index histories that drop losers and add winners must be handled with point-in-time membership, not today's roster painted backward. This problem shows up again in later quantitative units; this is where Level I first names it.

Timestamps and bar construction

A "daily close" is a convention. Equities have an exchange close; FX does not have a single global bell. Futures may have pit and electronic sessions. If two vendors stamp a print in different time zones, your 5-minute or daily bars will not match. Intraday studies fail when the timestamp and session definition are sloppy. Even daily Dow Theory work needs a defined close; mixed session definitions create false confirmations.

Rolled futures

Individual futures expire. To make a long history, vendors build continuous contracts by rolling from the expiring month to the next. Back-adjusted (ratio or difference) series can show prices that never traded. Unadjusted stitched series show roll gaps that look like crashes or spikes. A technician must know which continuous method is on the screen before measuring a "breakout" or a percentage objective.

Other integrity problems

Look-ahead bias uses restated or revised data that was not available on the signal date. Bad ticks (erroneous prints) create fake highs and lows that wreck breakout rules. Vendor holidays, trading halts, and consolidated versus primary-exchange prints change range. Open interest on futures is not volume; mixing them misreads participation.

Technician's checklist

Before trusting a chart for CMT-style work, name the asset class, name the instrument, confirm the market is liquid and public, and then ask how the series treats splits, dividends, survivorship, timestamps, rolls, and corporate actions. That checklist is this unit, end to end. History and Dow Theory told you why technicians read public closing prices in pairs. This section tells you which prices, on which contract, after which adjustments — or you are not doing technical analysis, you are decorating a spreadsheet.