Technical Analysis

Purpose

Read price and volume structure to characterize a trend and identify where a thesis would be proven wrong. Technical analysis describes what price is doing; it does not predict what it will do, and treating it as prediction is where practitioners lose money.

When to Use

• Assessing whether an instrument is trending, ranging, or breaking down.
• Identifying levels for entry, stop, and target.
• Confirming or contradicting a fundamental thesis with price action.
• Reviewing a chart before a trade.

Capabilities

• Trend structure: higher highs and lows, moving-average alignment.
• Support and resistance identification.
• Volume analysis and confirmation.
• Relative strength against a benchmark.
• Common patterns and their actual, unimpressive reliability.

Inputs

• Price and volume history, in sufficient length to see the structure.
• The benchmark, for relative strength.
• The time frame that matches the intended holding period.

Outputs

• A characterization of the trend and its stage.
• Levels: where the structure breaks, where resistance sits.
• An explicit invalidation point.

Workflow

1. Establish the trend, on the right time frame — Higher highs and higher lows is an uptrend. The 50-day above the 200-day, both rising, is a confirmed one. Match the time frame to the holding period; a daily chart is irrelevant to a multi-year position.
2. Mark the levels that matter — Prior swing highs and lows, and areas where price has repeatedly reversed. A level touched twice is a hypothesis; a level touched four times is a level.
3. Check volume — A breakout on below-average volume is a hypothesis without evidence. An advance on declining volume is a warning.
4. Measure relative strength — An instrument rising less than its index in an advance is weak, whatever the chart looks like in isolation.
5. Define the invalidation before entry — The price at which the read is wrong. This is the stop, and it must be identified before there is money at stake and an incentive to move it.

Best Practices

• Technical analysis is descriptive, not predictive. It tells you what has happened and where you are wrong. Anyone claiming it predicts is selling something.
• Volume is the confirmation. Price can be moved by a small amount of capital; volume cannot be faked.
• The more subjective the pattern, the less reliable it is. Trend and volume are near-objective. A head-and-shoulders is in the eye of the beholder, and the beholder has a position.
• Indicators are transformations of price. A dozen indicators derived from the same price series do not constitute a dozen confirmations — they are one observation, restated.
• The trend in the dominant time frame constrains the smaller ones. Buying a bounce in a confirmed downtrend is fighting the primary trend for a secondary move.
• Backtest any pattern you intend to trade. Most classic patterns perform far worse than their reputation, and several perform no better than random.

Examples

Characterizing structure objectively:

def trend_state(df: pd.DataFrame) -> TrendState:
    """Objective structure: no interpretation, no drawing on charts."""
    ma50  = df.close.rolling(50).mean()
    ma200 = df.close.rolling(200).mean()

    swing_highs = find_swing_highs(df, lookback=10)
    swing_lows  = find_swing_lows(df, lookback=10)

    higher_highs = swing_highs.iloc[-1] > swing_highs.iloc[-2]
    higher_lows  = swing_lows.iloc[-1]  > swing_lows.iloc[-2]

    return TrendState(
        structure=(
            "uptrend"   if higher_highs and higher_lows else
            "downtrend" if not higher_highs and not higher_lows else
            "range"
        ),
        ma_aligned=bool(ma50.iloc[-1] > ma200.iloc[-1] and ma200.diff().iloc[-1] > 0),
        above_ma50=bool(df.close.iloc[-1] > ma50.iloc[-1]),

        # The invalidation level: below the last higher low, the uptrend structure
        # is broken by definition. This is the stop, and it was chosen by the
        # structure rather than by how much loss feels tolerable.
        invalidation=float(swing_lows.iloc[-1]),

        # Volume confirmation on the most recent advance.
        volume_confirms=bool(
            df.volume.iloc[-5:].mean() > df.volume.iloc[-50:].mean() * 1.2
            and df.close.iloc[-1] > df.close.iloc[-5]
        ),

        # Relative strength: is it outperforming the benchmark?
        rs_vs_benchmark=float(
            (df.close.iloc[-1] / df.close.iloc[-63] - 1)
            - (bench.close.iloc[-1] / bench.close.iloc[-63] - 1)
        ),
    )

A read that is honest about its limits:

AAPL, daily:

Structure     : Uptrend. Higher highs and higher lows since the March low.
MA alignment  : 50-day above 200-day, both rising. Confirmed uptrend.
Location      : Price is 11% above the 50-day. Extended; the prior three
                touches of the 50-day were buyable, but chasing here has
                poor asymmetry.
Volume        : The last advance came on volume 18% BELOW the 50-day average.
                The move is not confirmed. This is the most important line here.
Relative str. : +4.2% vs SPY over 63 days. Leading.
Invalidation  : 182.40 — the last higher low. Below that, the uptrend structure
                is broken and this read is wrong.

What this does NOT tell you: whether it goes up from here. The structure is
constructive and the volume is not. That is a description, not a forecast.

Notes

• The distinction between description and prediction is the whole discipline. "Price is in an uptrend and will break 200" is two claims: the first is observable, the second is a guess wearing the first one's clothes.
• Most published pattern-reliability statistics come from studies with severe selection bias — the patterns were identified after the fact, on charts chosen because the pattern worked. Backtest on out-of-sample data or do not trust the number.
• This is educational material about chart-reading methodology, not financial advice, and not a recommendation to trade any instrument.