Technical analysis is a methodology used by traders to identify existing patterns in market movements, in order to predict how prices might move in the future and develop trading strategies.
The idea is that humans -- the entities who ultimately drive the asset prices upwards or downwards, based on how many of them want to buy and how many want to sell at any given point in time -- are forever driven by the same impulses (largely fear and greed), and that therefore one can predict how they will behave based on their past behaviour....MORE (she addresses one of my pet peeves)
The methodology sounds quite techy, being called technical analysis and all, but it might be better if it were called emotional or psychological analysis instead, seeing as those are the things that it captures (or attempts to capture, anyway).
Technical analysis is distinct from fundamental analysis, which studies a whole range of factors -- such as economic data, company earnings results, and political developments, to name but a few -- in order to measure the intrinsic value of a particular asset.
Many people buy into the latter, but think that trying to predict the direction of a given share price, commodity, or any other asset, based on drawing some lines on a chart (the former) is a little silly. But there’s silly, and then there’s downright stupid....
On the other hand, as a sometimes user of the tool, I resent the use of the word "silly":
Chartology: Monster “Mega-Phone” pattern breakout near?
You have to be careful with this stuff.
Humans are pattern-recognizing machines and are so good at it that we can see patterns that don't even exist.* In the instant case you really have to beware of imputing meaning to lines on charts; the reason technical analysis has any validity at all is because of "market memory" one example of which is resistance to upmoves caused by prior investors waiting to "get even and get out" and supplying stock to the market.
(one of the reasons to like new highs, no overhead supply)
In these long term chart there is no market memory, for example there are very few people with positions established at the Aug. 25, 1987 2722 DJIA high which is used as the basis of one of the trendlines shown here....
*****
... *On the other hand here's an example of what incisive pattern recognition can accomplish. This chart is from early June 2008 and foresaw what was coming:Technical Analysis: S&P Black Swan Formation
"The very rare black swan formation - note both feet and neck are complete and the rare vampire tooth variation is in place. This is very bad. Very very bad."...Lifted from from BloggingStocks: which in turn linked to Elite Traders, both links apparently semi-rotted:
A message board poster has put this hilarious chart showing that S&P 500 could be in for a rough ride. He writes that "The very rare black swan formation - note both feet and neck are complete and the rare vampire tooth variation is in place. This is very bad. Very very bad."...
