5 Key Aspects of Technical Analysis

Candlestick Patterns Reveal What, When, Why, Who, and Where

Technical Analysis is the study and interpretation of price, time, and volume for stocks and indexes. Due to the massive changes to the Stock Market Structure since the Banking Debacle and Subprime Mortgage disaster, Technical Analysis has been evolving and changing.

There are many aspects of Technical Analysis including Candlestick Patterns, Support and Resistance, Trendline Patterns, Angle of Ascent™ and Angle of Descent™ as well as Overall Trend, Uptrend, Downtrend, Sideways Trending, Institutional activity, High Frequency Trader activity, Small Funds and Retail activity, Entry and Exit Signals, and Indicators.

All of this can be simplified down to 5 areas of analysis which makes stock pick selection faster, easier, and far more reliable.

Here is a list of the 5 Key Aspects of Technical Analysis to analyze and interpret:

1. WHAT is the basic type of sideways price action in terms of width:

a. Trading Range

b. Platform

c. Consolidation

d. Wide Sideways

e. Bottoming

f. Topping

g. Compression

A Trading Range is the answer. Two Trading Range Market Conditions are outlined by red boxes in the chart example below.

2. WHEN does a Trading Range occur or in other words, in which of the following Market Conditions do Trading Range sideways patterns develop:

a. Platform Markets

b. Trading Range Market Conditions

c. Topping Market Conditions

d. Long-Term Bottoms after a Great Bear Market

e. Occasionally in Moderately Trending Markets, when Index component stocks are lagging behind new technology stocks.

The WHEN helps identify the current Market Condition. This is critical information because the Market Condition present at the time you decide to buy a stock, tells you how much momentum is in the market, how resistance and support will behave, where to place stop losses, how to calculate run gain or target gain potential, and the overall risk.

3. WHY tells you the reason the stock is moving in that particular trend and trendline pattern. It defines the overall fundamental conditions and economic conditions that can and do influence technical patterns. Adding fundamental indicators to your analysis will help clarify the institutional interest, and other crucial financial information. Using fundamental indicators in addition to technical indicators, streamlines the decision of which stock to invest or trade.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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