Technical analysis primer

Technical analysis studies price and volume history to forecast future price movements. The core premise: all available information is already reflected in the price, and price patterns repeat because human psychology, fear, greed, herd behaviour, is consistent across time and markets.

This contrasts with fundamental analysis, which looks past the price to assess intrinsic value. A technician doesn't care what a company earns, she cares where price has been, where volume has clustered, and what pattern is forming.

Whether technical analysis "works" is contested. Academic research (efficient markets hypothesis) argues it cannot consistently generate alpha. Practitioners argue that self-fulfilling prophecies (everyone watching the same support level will act similarly when it's breached) create real price dynamics. As a practitioner, understanding technical analysis is useful even if you're primarily a fundamentals investor, it helps you time entries and exits and understand market sentiment.

Core concepts:

1. Support and Resistance

• Support: price level where buying interest has historically arrested a decline
• Resistance: price level where selling pressure has historically capped a rally
• Breached resistance often becomes new support (and vice versa)

2. Trend and Moving Averages

• Uptrend: higher highs, higher lows; downtrend: lower highs, lower lows
• Simple Moving Average (SMA): average price over N periods (e.g., 50-day, 200-day)
• Exponential Moving Average (EMA): weights recent prices more heavily
• Golden cross (50-day SMA crosses above 200-day SMA): bullish signal
• Death cross (50-day below 200-day): bearish signal

3. Relative Strength Index (RSI)

• Momentum oscillator: 0–100 scale. RSI > 70: overbought; RSI < 30: oversold
• Divergence (price makes new high but RSI doesn't) signals weakening momentum

4. MACD (Moving Average Convergence Divergence)

• MACD line = 12-day EMA − 26-day EMA; Signal line = 9-day EMA of MACD
• Crossovers generate buy/sell signals

5. Candlestick patterns

• Doji: indecision; Hammer/Hanging Man: potential reversal; Engulfing: strong directional signal
• Most reliable when appearing at key support/resistance levels