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Finance Dictionary and Glossary of Investment Terms
A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered. Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis assumes that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, many technical analysts are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock.
The practice of trying to divine stock prices by examining trading patterns and comparing the shape of current charts to those from the past. A cornerstone of technical analysis is Dow Theory (not to be confused with Dow Dividend Theory), which states that in a true bull or bear trend, both the Dow Jones Industrial and Dow Jones Transportation averages must be moving in the same direction. In general, Dow Theory adherents will buy when the market moves higher than a previous peak, and sell when it goes below the preceding valley.Technical analysts use a variety of complex charting techniques, but some of the most basic involve plotting price movements in a stock over time on a fever chart. The shape of the chart is supposed to reveal something about whether the stock is headed up or down. A head and shoulders pattern, for instance, could imply a stock has topped out. Technicians look for stocks that have broken through their resistance level (on the upside). A stock that has broken through its support level (on the downside) is considered poised for further losses.Critics deride technical analysis as only so much hocus-pocus, not far removed from tea-leaf reading. Advocates insist that the stock market clearly moves in broad patterns, and that these can be recognized by careful charting and a knowledge of history. Whether or not technical analysis has any validity, it has a good many adherents, and on that basis alone influences stock prices.
Security analysis that seeks to detect and interpret patterns in past security prices.
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value but rather use charts to identify patterns that can suggest future activity.