Technical Analysis and the Market's Own Data

Learning objectives

By the end you can:

1. State what technical analysis claims, summarise what the empirical record supports and what it does not, and give three defensible reasons a fundamental analyst learns it anyway.
2. Construct and read line, bar, candlestick and point-and-figure charts from the same closes, and demonstrate numerically how a linear scale and a logarithmic scale lead to different conclusions about the same series.
3. Draw trend, support and resistance from a real price series, apply the change-of-polarity principle, and say precisely why a trendline is a hypothesis rather than a measurement.
4. Compute a measured-move target from a head-and-shoulders pattern under both projection conventions, price the trade against a stated stop, and produce the break-even hit rate the pattern needs to pay.
5. Compute simple and exponential moving averages by hand, mark every crossover on a long series, and price the whipsaws in currency using a stated transaction-cost stack.
6. Compute the relative strength index with Wilder smoothing, the moving average convergence divergence line with its signal and histogram, and the stochastic oscillator, all by hand, and identify divergence with its confirmation lag stated.
7. Build an advance-decline line and a new-high-minus-new-low spread, read a breadth divergence against an index top, and explain why breadth carries more evidential weight than single-price patterns.
8. Name the measurement problem in each of the common sentiment series, and read the price-and-open-interest four-cell table on Indian derivatives data.
9. Apply the multiple-testing critique to any indicator rule: count the configurations tried, compute the expected maximum Sharpe under the null, deflate the observed one, and state the verdict.
10. Read an Indian chart correctly through circuit bands, delivery percentage and open interest, and decide what to keep from this toolkit and what to discard.

Prerequisites & connections

Builds on. M9.02 supplies the efficient-markets frame and the active-versus-passive argument, including the weak-form claim that this node then tests against real arithmetic; it also supplies the honest position on factor investing that the momentum discussion here leans on. M0.02 supplies market microstructure: the order book, the price bands, the market-wide circuit breakers, and the transaction-cost stack. M0.04 supplies the contract note whose rate card prices every trade below: STT, stamp duty, exchange and SEBI charges, GST and the depository fee. It also supplies the finding that an Indian delivery round trip costs about 0.2327% of capital against about 0.0530% in the US. M6.04 supplies anchoring and recency, which are what a support level and a chart pattern are made of. QM1.02 supplies hypothesis testing, regression and the multiple-comparisons problem; QM1.04 supplies the sampling distribution of a Sharpe ratio, which is what makes deflation possible at all. M9.01 supplies position sizing and the stop arithmetic used in the practice set.

Feeds forward. M9.03 takes the sell decision, where a price stop and a thesis stop have to be told apart, and the failure mode of selling a good business because a line broke belongs there. M9.04 wires the surviving pieces into a written process. QD1.02 constructs the momentum factor properly, in code, as a cross-sectional ranking device. QD1.03 owns the backtesting engine, the trial-counting discipline and the deflated Sharpe machinery, which this node applies rather than derives. QD2.01 owns execution and the order types you would actually use once a chart has told you when.

Five neighbours own material this node deliberately leaves alone. M9.02 owns market efficiency, the Sharpe arithmetic of active management, the SPIVA record and the factor tour, and it keeps its sceptical stance; nothing here restates that argument. M0.02 owns the order book, the auction mechanics and the settlement chain; only the chart-distorting consequences of circuit bands appear here. QD1.02 owns factor construction, the information coefficient and the twelve-minus-one momentum recipe; the relative-strength section here explains how a bilateral ratio differs from a cross-sectional rank and stops there. QD1.03 owns backtest construction, look-ahead harnesses and the deflated Sharpe derivation; here the formula is quoted with its source and applied once. M6.04 owns the behavioural mechanisms; this node names them where they explain why a level holds and moves on.