Technical Analysis
Technical analysis takes a completely different approach to stock valuation. Instead of evaluating the company itself, it focuses entirely on what the market is doing.
Core Philosophy
- Technical analysis studies past market data (primarily price and volume) to forecast future price movements
- Based on the belief that all relevant information (financial data, news, market sentiment) is already reflected in the stock price
- Does NOT evaluate the company's financial statements, management quality, or competitive position
- Focuses on when to buy or sell, not what to buy
Think of it this way: A fundamental analyst reads the restaurant's menu and reviews before deciding where to eat. A technical analyst watches which restaurants have long lines and bets the trend will continue.
Key assumption: Market prices move in recognizable, repeating patterns driven by supply and demand
Exam Tip: Gotchas
- Technical analysts do NOT try to find undervalued stocks. They believe supply and demand patterns repeat, so they focus on price action rather than company value.
- "All information is already in the price" is a technical analysis assumption, not a fundamental one.
Tools and Indicators
Technical analysts use a variety of chart-based tools:
| Tool | What It Shows |
|---|---|
| Moving averages | Smoothed price trends over a set period (e.g., 50-day, 200-day) |
| Support levels | Price floor where buying pressure historically prevents further decline |
| Resistance levels | Price ceiling where selling pressure historically prevents further rise |
| Relative strength | How a stock's price performance compares to a benchmark index |
| Volume analysis | Trading volume confirms or contradicts price movements |
- A stock breaking above resistance on high volume signals a potential breakout
- A stock falling below support on high volume signals a potential breakdown
- Price movement on low volume is considered less reliable
Exam Tip: Gotchas
- Volume confirms price movement. A breakout on high volume is more meaningful than one on low volume. If the exam describes a price move without strong volume, that signal is weaker.
- Support and resistance are not guarantees. They are historical price levels where buying or selling pressure has appeared before. A break through these levels on high volume is a stronger signal.
What Technical Analysis Does NOT Do
Frequently tested on the exam:
- Does not attempt to determine a stock's intrinsic value
- Does not analyze financial statements (income statements, balance sheets)
- Does not consider earnings, revenue, or management quality
- Does not evaluate industry conditions or competitive advantages
Exam Tip: Gotchas
- The exam tests whether you can identify the method from the analyst's activities. Analyzing charts, patterns, volume data, or support/resistance levels = technical analysis. Calculating intrinsic value or reviewing financial statements = fundamental analysis.