Quick Answer
Technical analysis predicts future price direction from historical price and volume data alone, ignoring financial statements or earnings entirely. It assumes the current price already reflects all known information and is used mainly for short-term trading, using tools like support, resistance, moving averages, and chart patterns.
The exam mostly asks you to sort a tool, indicator, or pattern into the technical-analysis bucket and to read what a described price/volume move signals.
What Does Technical Analysis Believe About Price?
Technical analysis uses historical price movements and trading volume to predict future price direction. It ignores a company's underlying fundamentals entirely: no financial statements, earnings, or intrinsic value.
- All relevant information is already reflected in the stock price
- Primarily used for short-term trading decisions
- Past price behavior can predict future price movements
What Are the Core Technical Analysis Tools?
| Tool | Description |
|---|---|
| Support level | Price floor where buying pressure prevents further decline |
| Resistance level | Price ceiling where selling pressure prevents further advance |
| Breakout | Price movement through a support or resistance level, often on high volume |
| Moving averages | Smoothed average of past prices over a set period (e.g., 50-day, 200-day) |
| Volume | Number of shares traded; confirms strength of price movements |
| Trend lines | Lines drawn connecting price highs or lows to identify direction |
What Chart Patterns Does the Exam Test?
- Head and shoulders - three peaks (middle tallest); signals trend reversal from bullish to bearish
- Inverse head and shoulders - three troughs (middle deepest); signals reversal from bearish to bullish
- Double top - two peaks at a similar level ("M" shape); signals reversal from bullish to bearish
- Double bottom - two troughs at a similar level ("W" shape); signals reversal from bearish to bullish
- Cup and handle - rounded bottom followed by slight pullback; bullish continuation pattern (the existing uptrend is expected to persist)
Sketch of the pattern that gets tested most, a head and shoulders top: the left and right peaks (shoulders) are roughly the same height, the middle peak (head) is the tallest, and the neckline connects the two troughs beneath them. A break below the neckline confirms the reversal to a downtrend.
An inverse head and shoulders (three troughs, middle deepest) is the same shape flipped upside down, and it signals a reversal to an uptrend instead.
A double top forms two peaks at roughly the same price level, separated by a single trough. The stock tries to break higher twice, fails both times, and that failure signals a reversal from an uptrend to a downtrend. A double bottom is the mirror image: two troughs at a similar level where sellers fail twice to push the price lower, signaling a reversal from a downtrend to an uptrend.
Exam Tip: Gotchas
- Head and shoulders = REVERSAL (bullish → bearish). Candidates sometimes flip this with "cup and handle" (which is a BULLISH CONTINUATION pattern: it still signals a bullish outlook, but because the uptrend continues rather than reverses into one). The exam tests whether you can sort reversal vs. continuation patterns at a glance.
What Key Indicators Should You Know?
- Moving average crossover - short-term average crossing above long-term average is bullish (golden cross); crossing below is bearish (death cross)
- Relative strength - compares a stock's price performance to the overall market or sector
- Volume confirmation - price movements on high volume are more significant than those on low volume
Exam Tip: Gotchas
- Technical analysts do NOT care about earnings, dividends, book value, or balance sheets. If a question mentions "charts," "volume," "support/resistance," or "moving averages," the answer involves technical analysis. If it mentions "financial statements," "earnings," or "intrinsic value," the answer involves fundamental analysis.
- Relative strength is not the same as momentum. Relative strength specifically compares a stock's price performance against a benchmark or peer, such as a stock outperforming the S&P 500. Momentum describes the speed of a security's own price change and is not conventionally stated relative to a benchmark. If a question compares a stock's performance to an index or sector, the tested concept is relative strength.
How Does Technical Analysis Compare to Fundamental Analysis?
| Dimension | Fundamental Analysis | Technical Analysis |
|---|---|---|
| What it examines | The company (financials, earnings, assets) | The stock price and volume |
| Data sources | Financial statements, Securities and Exchange Commission (SEC) filings, economic data | Price charts, volume data, indicators |
| Time horizon | Long-term | Short-term |
| Goal | Determine intrinsic value | Predict price direction |
| Key tools | Price-to-earnings (P/E), price-to-book (P/B), earnings per share (EPS), discounted cash flow (DCF), dividend discount model (DDM) | Support/resistance, moving averages, volume, chart patterns |
| Core belief | Market price may deviate from true value | Price reflects all known information |
What Should You Check on Exam Day?
- Can you sort a described tool, indicator, or data source into technical versus fundamental analysis on sight?
- Can you tell a reversal pattern (head and shoulders, inverse head and shoulders, double top, double bottom) from the one bullish continuation pattern (cup and handle)?
- Do you know which direction a golden cross versus a death cross signals?
- Can you distinguish relative strength (compared to a benchmark or peer) from momentum (a security's own price speed, no benchmark)?
- Can you explain why a technical analyst ignores earnings, dividends, and balance sheets entirely?