Trends, Breadth & Market Theories

Market trends

• A market trend describes the market’s general direction over time. On any given trading day, prices move up and down. A trend line helps you step back and see the “big picture” direction.
• Even though a chart shows short-term ups and downs, a stock can be clearly trending upward overall. If that were a one-month chart, you’d describe the market as bullish over that timeframe.
• ⚠️ Temporary declines happen in bull markets, but the higher-level view still shows a rising market.

Moving averages

• One common way to draw a trend line is with a moving average. A moving average smooths out daily price changes by averaging prices over a set period.
• For example, a 100-day moving average calculates the average price of a stock over the past 100 days. Because time keeps moving forward, the data in the average changes each day:

• Today’s closing price is added to the calculation.
• The closing price from 101 days ago drops out (it’s no longer included).

• Trend lines and moving averages can also describe bearish markets. A chart may contain several upward moves, but prices are generally falling over the period.

Advance/decline line and market breadth

• Trends can be identified with charts, but you can also spot them using number-based data.
• The S&P 500 is an index of 500 large publicly traded companies in US markets.
• One way to gauge the market’s overall direction is the advance/decline line, which compares how many stocks rose versus fell.

Example 1 — bullish breadth, overbought market

S&P 500 stocks

Date	Price increases	Price decreases
Monday	425 stocks	75 stocks
Tuesday	375 stocks	125 stocks
Wednesday	350 stocks	150 stocks

• Over these three days, more stocks rise than fall each day, so the data suggests the market is rising. This idea is called market breadth, which refers to the overall direction of price movements across the market.
• Here, breadth is bullish (increasing). At the same time, the number of declining stocks is growing each day, which suggests the market may be shifting toward bear territory.
• That shift is a reversal. In this context, it’s described as an overbought market.
• An overbought market occurs when overall prices are rising, but the market is starting to move toward a decline. On a chart, prices are still moving up, but not as strongly as before. If that pattern continues, eventually more stocks will fall than rise, leading to an overall market decline.

Example 2 — bearish breadth, oversold market

S&P 500 stocks

Date	Price increases	Price decreases
Monday	50 stocks	450 stocks
Tuesday	90 stocks	410 stocks
Wednesday	160 stocks	340 stocks

• Over these three days, more stocks fall than rise each day, so the data suggests the market is falling. Again, this is market breadth.
• Here, breadth is bearish (decreasing). However, the number of advancing stocks increases each day, suggesting the market may be shifting toward bull territory. This is another reversal, and it’s described as an oversold market.
• An oversold market occurs when overall prices are decreasing, but the market is starting to trend toward a rise. Prices aren’t falling as much as they were earlier. If the trend continues, eventually more stocks will increase than decrease, leading to a rising market.

Consolidation

• When a stock price (or the overall market) shows reduced volatility, a consolidation may be occurring.
• If price movements look indecisive and stay within a specific range, it’s difficult to draw a clear trend.
• Example: prices were falling at first, then stabilized and stayed within a narrow range.
• Traders looking for quick price movement often avoid stocks showing this behavior.
• However, this can be a good environment for a flat market strategy (like covered calls, which are covered later).

Market volume

• Market volume is another trend technical analysts watch. Volume measures how much trading occurs in a stock or in the overall market.

For example, the average daily trading volume of Snapchat stock (ticker: SNAP) is approximately 50 million shares (as of mid-2026). If the number of shares traded on a given day changes dramatically (for example, 150 million shares of SNAP trade in one day), that would stand out to a technical analyst.

• The meaning of a volume spike can vary, but it’s an important data point for chartists.

Resistance & support levels

• If a market or stock price repeatedly fails to move above or below certain price points, you can identify resistance & support levels.

When this stock approaches $50, it reverses downward. That price is the resistance level ($50 in this example). When it approaches $40, it reverses upward. That price is the support level ($40 in this example).

• This is also an example of a consolidating market, which makes it difficult to assign a clear trend. While the price stays between support and resistance, a neutral strategy (like covered calls) could be profitable.

Breakouts

• To identify a bullish or bearish trend, a breakout typically needs to occur.

Upside breakout

• When a breakout occurs, prices often continue moving in the same direction.
• One explanation is that many investors watch these levels, which can create a self-fulfilling effect. When prices rise above resistance, investors may “jump on the bandwagon,” buy the stock, and push demand higher. That increased demand can drive prices up further.
• 🔑 An upside breakout (above resistance) is a bullish indicator.

Downside breakout

• Downside breakouts also tend to continue in the same direction.
• When prices fall below support, investors may “jump off the bandwagon” and sell to avoid further losses. A more savvy technical analyst might sell short and profit if the market continues to fall.
• As investors react to the downside breakout, increased supply (sales of the security) can push the price down even further.
• 🔑 A downside breakout (below support) is a bearish indicator.

Theories

In general, theories about analyzing and predicting market trends fall under technical analysis. Several theories exist, but you only need to know a few for the exam.

Odd lot theory

• From SIE studies: a round lot is a standardized unit of trading; for stocks, typically 100 shares.
• Institutions and wealthier investors often have access to more capital and more information, and they tend to trade in round lots (hundreds or thousands of shares).
• There’s nothing inherently wrong with trading odd lots.
• 🔑 Put simply: technical analysts identify odd-lot trends and do the opposite.

Short interest theory

• Investors can sell short to bet against a security.
• ⚠️ A high short interest might sound bearish, but the short interest theory is counterintuitive.
• Reasoning: when investors sell short, they must buy the shares back later to return the borrowed shares to their financial firm. If a stock has high short interest, much of the selling pressure has already been reflected in the current price. When short sellers eventually buy to cover, that buying increases demand and can push the price upward.
• 🔑 Under this theory:
  • The higher a stock’s short interest, the more bullish technical analysts tend to be.
  • The lower a stock’s short interest, the more bearish chartists tend to be.

Key points

Market trend

• Identifies general market movement
• Trend lines depict bullish or bearish directions
• Moving averages are a type of trend line

Advance/decline line

• Details the number of stocks up vs. down
• Helps determine overbought or oversold markets

Overbought market

• Rising market, but starting to trend downward
• Bearish indicator

Oversold market

• Falling market, but starting to trend upward
• Bullish indicator

Consolidation

• Market moves within narrow parameters
• Indicates uncertain or neutral market

Market volume

• Measures the number of securities traded

Resistance levels

• The market price where stock avoids going above
• Breakout above is a bullish indicator

Support levels

• The market price where stock avoids going below
• Breakout below is a bearish indicator

Round & odd lots

• A round lot is a standard trading denomination
• Typical round lot (stock) = 100 shares
• Odd lot denomination is less than a round lot

Odd lot theory

• Investors trading in odd lots are wrong
• Do the opposite of odd lot trends to profit

Short interest

• Percentage of shares sold short

Short interest theory

• High short interest = bullish indicator
• Low short interest = bearish indicator

Efficient markets theory

• Market prices instantly reflect new public info

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.