Technical Analysis
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.
Core Belief
- 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
Core 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 |
Chart Patterns
- 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 / double bottom - two peaks or troughs at similar levels; reversal signals
- Cup and handle - rounded bottom followed by slight pullback; continuation pattern
Exam Tip: Gotchas
- Head and shoulders = REVERSAL (bullish → bearish). Candidates sometimes flip this with "cup and handle" (which is a CONTINUATION pattern). The exam tests whether you can sort reversal vs. continuation patterns at a glance.
Key Indicators
- 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.
Technical vs. 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 |