Stock prices tend to move, or trend, together (although some move in opposite directions). The average stock, by definition, tends to rise in abull market and decline in a bear market. Technical analysts chart thedaily prices and volume movements of individual stocks and market indices to discern patterns that allow them to predict the direction of market price movements.

Technical analysts also keep a close eye on market trading volume.

Volume that is substantially above normal signifies (or confirms) a pattern in a direction of prices. If overall volume has been listless formonths and then suddenly jumps dramatically, a technical analyst would view this change in trading volume as the beginning of a trend.

Technical analysts closely watch market breadth, which is the number of issues closing up or down on a specific day. The number of advances anddeclines can be a significant indication of the market’s relative strength.

When declines outnumber advances by a large amount, the market is considered bearish even if it closed higher. In bull markets, the oppositeis true and advances substantially outnumber declines. Technical analystsplot daily advance and decline ratios on a graph to produce an advance/decline line that gives them an indication of market breadth trends.

In addition to studying the overall market, technical analysts attempt to identify patterns in the prices of individual stocks. Technical analystschart stocks with trendlines. While a stock’s price may spike up or downdaily, over time its price tends to move in one direction. Technicalanalysts identify patterns in these trendlines of individual stocks from graphs in the same way they identify patterns in the overall market.

Technical analysts then base their buy or sell recommendations on a stock’s price trendline. An upward trendline is bullish; a downward one isbearish.

A trendline connects the reaction lows in an uptrend and the rally highs in a downtrend. Some common patterns in a stock’s price are consolidationsand reversals. Consolidation occurs when a stock’s price stays within anarrow trading range. When viewed on a graph, the trendline is horizontaland moves sideways, neither up nor down. A reversal indicates that anupward or downward trendline has halted and the stock’s price is moving in the opposite direction. In between the two trendlines, a period ofconsolidation occurs and the stock price levels off.

Stock prices may move within a narrow range for months or even years.

The bottom of this trading range is known as the support level; the top of the trading range is called the resistance level. When a stock declines toits support level, the low price attracts buyers, whose buying then supports the price and keeps it from declining further. When the stockincreases to its resistance level, the high price attracts sellers, whose selling then hinders a further rise in price. Stocks may fluctuate intrading ranges for months, testing their support and resistance levels regularly.

(Alan S. Moore is a financial advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc.)

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