room to fall. However, if no one would buy it at $71.50, then $71.50 would become a resistance level. But then, using a similar analysis, no one would buy it at $71, or $70, and so on. The notion of a resistance level is a logical conundrum. Its simple resolution is the recognition that if the stock is ever to sell at $71.50, investors must III. Equilibrium In Capital Markets 12. Market Efficiency The McGraw−Hill Companies, 2001           348 PART III Equilibrium in Capital Markets     believe that the price can as easily increase as fall. The fact that investors are willing to pur- chase (or even hold) the stock at $71.50 is evidence of their belief that they can earn a fair expected rate of return at that price.     CONCEPT C H E C K ☞ QUESTION 2 If everyone in the market believes in resistance levels, why do these beliefs not become self-ful- filling prophecies?     An interesting question is whether a technical rule that seems to work will continue to work in the future once it becomes widely recognized. Aclever analyst may occasionally uncover a profitable trading rule, but the real test of efficient markets is whether the rule it- self becomes reflected in stock prices once its value is discovered. Suppose, for example, that the Dow theory predicts an upward primary trend. If the the- ory is widely accepted, it follows that many investors will attempt to buy stocks immedi- ately in anticipation of the price increase; the effect would be to bid up prices sharply and immediately rather than at the gradual, long-lived pace initially expected. The Dow the- orys predicted trend would be replaced by a sharp jump in prices. It is in this sense that price patterns ought to be self-destructing. Once a useful technical rule (or price pattern) is discovered, it ought to be invalidated when the mass of traders attempt to exploit it. Thus the market dynamic is one of a continual search for profitable trading rules, fol- lowed by destruction by overuse of those rules found to be successful, followed by more search for yet-undiscovered rules.     Fundamental Analysis   Fundamental analysis uses earnings and dividend prospects of the firm,