Technical analysis
Technical analysis, drawn and explained
In plain words
Technical analysis reads a stock chart to spot its trend, the zones where it bounces or stalls, and the patterns traders watch. PairScanner does it for you every evening, draws it on the chart and explains every number in one sentence.
An analysis, number by number
This is what a stock sheet looks like in PairScanner. The stock and the figures are fictional.
Click a number to learn its role
TrendUpabove the 50 and 200 averages
My role: tell you the underlying direction. Here the stock is above its 50- and 200-session averages, and the 50-session average is rising: the trend is up.
MomentumRSI 58no excess either way
My role: measure the strength of recent rises and falls, from 0 to 100. Above 70 the stock has risen a lot; under 30 it has fallen a lot. 58: healthy momentum.
VolatilityNormal1.8% a day
My role: tell you whether the stock moves more than usual. Here it moves 1.8% a day on average, normal for the past year.
Volume2.3 timesthe usual volume
My role: tell you whether many traders follow the move. 2.3 times the usual volume on an up day: the rise has followers.
Support-4.1%touched 3 times
My role: show the zone where the stock often bounced. It is 4.1% below today and held three times.
Resistance+3.4%touched 2 times
My role: show the zone where the stock often stalled. It is 3.4% above today.
What PairScanner does
Every evening after the US close, PairScanner analyzes the 1,000 most liquid US stocks and the best-known names. For each one, it measures the trend from the 50- and 200-session averages, momentum with the 14-session RSI, volatility against the past year and volume against usual.
It finds support and resistance, draws trendlines and looks for simple patterns: one-year high or low, range breakout, double top or double bottom, and candle patterns such as the hammer or the engulfing.
Everything is drawn on the chart, every term has its ?, and one sentence says what each number means. You search a stock and read its sheet, with nothing to calculate.
The idea in detail
A chart tells the story of buyers and sellers. A trend is a series of higher highs and higher lows, or lower ones. Moving averages make it readable by smoothing the day-to-day noise.
Support is a zone where buyers often came back: the stock bounced there several times. Resistance is the opposite, a zone where sellers often took over. The more often a zone was touched, the more it matters.
Volume tells you whether a move has followers: a rise carried by heavy trading weighs more than a rise in a quiet market.
A worked example
A fictional stock gains 2% in the day on 2.3 times its usual volume. It is above its 50- and 200-session averages, 3.4% under a resistance touched twice and 4.1% above a support touched three times.
The reading is simple: uptrend, a rise with followers, a zone to clear just above and a safety net below. The sheet shows it on the chart and says it in four sentences.
Fictional example for teaching purposes. It is neither a signal nor a recommendation.
What research says
In 1992, William Brock, Josef Lakonishok and Blake LeBaron tested simple moving-average and trading-range-break rules on the Dow Jones from 1897 to 1986: returns after buy signals were higher and less volatile than after sell signals.
In 2000, Andrew Lo, Harry Mamaysky and Jiang Wang automated chart pattern detection on US stocks from 1962 to 1996: several patterns, including the double bottom, carry additional information about returns.
The 2007 review by Cheol-Ho Park and Scott Irwin covers 95 modern studies: 56 find positive results for technical analysis. And nearness to the one-year high, studied by Thomas George and Chuan-Yang Hwang in 2004, helps forecast future returns, as does the trend of the last 12 months, documented by Tobias Moskowitz, Yao Hua Ooi and Lasse Pedersen in 2012.
Sources
Studies cited on this page:
- William Brock, Josef Lakonishok and Blake LeBaron (1992). Simple Technical Trading Rules and the Stochastic Properties of Stock Returns. The Journal of Finance, 47(5), 1731-1764.
- Andrew W. Lo, Harry Mamaysky and Jiang Wang (2000). Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation. The Journal of Finance, 55(4), 1705-1765.
- Cheol-Ho Park and Scott H. Irwin (2007). What Do We Know About the Profitability of Technical Analysis?. Journal of Economic Surveys, 21(4), 786-826.
- Thomas J. George and Chuan-Yang Hwang (2004). The 52-Week High and Momentum Investing. The Journal of Finance, 59(5), 2145-2176.
- Tobias J. Moskowitz, Yao Hua Ooi and Lasse Heje Pedersen (2012). Time Series Momentum. Journal of Financial Economics, 104(2), 228-250.
PairScanner promises no results. Educational content: neither investment advice nor a prediction; PairScanner places no orders.
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