power of the theory. Other chartist techniques involve moving averages. In one version of this approach av- erage prices over the past several months are taken as indicators of the "true value" of the stock. If the stock price is above this value, it may be expected to fall. In another version, the moving average is taken as indicative of long-run trends. If the trend has been down- ward and if the current stock price is below the moving average, then a subsequent increase in the stock price above the moving average line (a "breakthrough") might signal a rever- sal of the downward trend. Another technique is called the relative strength approach. The chartist compares stock performance over a recent period to performance of the market or other stocks in the same industry. Asimple version of relative strength takes the ratio of the stock price to a market indicator such as the S&P 500 index. If the ratio increases over time, the stock is said to ex- hibit relative strength because its price performance is better than that of the broad market. Such strength presumably may continue for a long enough period of time to offer profit op- portunities. One of the most commonly heard components of technical analysis is the notion of resistance levels or support levels. These values are said to be price levels above which it is difficult for stock prices to rise, or below which it is unlikely for them to fall, and they are believed to be levels determined by market psychology. Consider, for example, stock XYZ, which traded for several months at a price of $72, and then declined to $65. If the stock eventually begins to increase in price, $72 is considered a resistance level (according to this theory) because investors who bought originally at $72 will be eager to sell their shares as soon as they can break even on their investment. Therefore, at prices near $72 a wave of selling pressure would exist. Such activity imparts a type of "mem- ory" to the market that allows past price history to influence current stock prospects. Technical analysts also focus on the volume of trading. The idea is that a price decline accompanied by heavy trading volume signals a more bearish market than if volume were III. Equilibrium In Capital Markets 12. Market Efficiency The McGraw−Hill Companies, 2001           CHAPTER 12 Market Efficiency 347     Figure 12.4 Market diary.