Chartered Market Technician (CMT) Practice Exam

A breakout typically indicates a change in market direction. In technical analysis, a breakout occurs when the price of a security moves above a resistance level or below a support level with increased volume. This movement is often interpreted as a signal that the prevailing trend may be shifting.

For instance, when the price breaks above resistance, it suggests that buyers are gaining control and may push prices higher, indicating a bullish trend. Conversely, if the price breaks below support, it can suggest that sellers are in control, signaling a potential bearish trend. Thus, traders often look to breakouts as important indicators of momentum shifts in the market, as they can lead to significant price movements in the direction of the breakout.

The context of other options clarifies why they do not align with the primary interpretation of a breakout. An impending price correction refers to a retracement rather than a decisive movement in one direction. The continuation of the existing trend could be true in some instances, but the breakout itself specifically suggests a moment of potential change rather than mere continuation. A false signal implies that the breakout does not lead to a substantial price movement, which contradicts the fundamental expectation of breakouts often leading to significant price changes.