Quick Answer
Technical analysis forecasts future price movements by studying past price and volume data, assuming all relevant information is already reflected in the stock price. It ignores financial statements, management quality, and competitive position. The focus is when to buy or sell, not what to buy.
This lesson opens the valuation unit because seeing technical analysis first makes it easier to spot the contrast with fundamental analysis, DDM, and DCF in the lessons that follow. All three of those methods try to price the company; technical analysis never does.
What Does Technical Analysis Study?
- 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.
What Tools Do Technical Analysts Use?
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 Does Technical Analysis Ignore?
- 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 means technical analysis. Calculating intrinsic value or reviewing financial statements means fundamental analysis.
What Should You Check on Exam Day?
- Confirm the analyst is reading charts, volume, or price patterns, not financial statements, before labeling a scenario "technical"
- Remember technical analysis never calculates intrinsic value; it only times entry and exit points
- Treat "all information is already in the price" as a technical-analysis assumption, not a fundamental one
- Weigh a breakout or breakdown signal against volume: high volume confirms it, low volume weakens it