Chapter 10 of 15
Technical Analysis - Introduction
Charts, support/resistance, moving averages basics.
Rahul's batting coach showed him a video analysis session before a big series.
"See this? Every time the ball pitches outside off stump, your front foot doesn't move to the pitch. That's why you're getting caught in the slips." He pulled up the same clip four times. The pattern was undeniable.
That's pattern recognition from data. Which is exactly why, when Rahul heard about technical analysis, the art of finding patterns in stock price charts, he was immediately curious.
But his data science training also made him cautious. Finding patterns in historical data doesn't guarantee they'll repeat. Overfitting is a real danger. He went in with open eyes.
What Is Technical Analysis?
Technical analysis is the study of historical price and volume data to forecast future price movements. It operates on the principle that market psychology repeats, creating recognisable chart patterns and statistical signals.
Technical analysis doesn't care about a company's balance sheet, earnings, or competitive moat. It cares about one thing: what are buyers and sellers doing, and what does that suggest about what they'll do next?
It's the opposite of fundamental analysis. Both have value, and both have serious limitations.
The Core Assumptions of Technical Analysis
Before diving into specific tools, understand what TA believes:
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Price discounts everything: All known information (earnings, news, insider expectations) is already reflected in the price. You don't need to study the business, the price says it all.
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Prices move in trends: Stocks don't move randomly in the short term. They form trends that persist until something breaks them.
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History repeats: Human psychology (fear, greed, panic, euphoria) creates repeatable patterns in price data.
Rahul's data science brain had a healthy scepticism: assumption 3 is the weakest. Markets evolve. Patterns that worked in 2010 may not work in 2025. But the first two assumptions have real supporting evidence.
Reading a Candlestick Chart
The candlestick chart is the most common chart type in Indian trading apps.
Each candlestick represents price movement in one time period (1 minute, 1 day, 1 week, your choice). The "body" shows opening and closing price. The "wicks" (thin lines) show the highest and lowest price during that period.
- Green candle (hollow or green body): Closing price > opening price. Buyers dominated that period.
- Red candle (filled or red body): Closing price < opening price. Sellers dominated.
A long green candle = strong buying. A long red candle = strong selling. A tiny body = indecision, buyers and sellers were roughly equal.
Support and Resistance: The Most Useful TA Concept
Support is a price level where buyers have historically stepped in to stop further decline, the floor. Resistance is a price level where sellers have historically appeared to halt further rise, the ceiling. These levels matter because many traders place orders around them.
Why do these levels work? Because of memory. If Infosys held at ₹1,400 three times and bounced, thousands of traders remember that. Next time it approaches ₹1,400, they buy again, reinforcing the level.
This is a self-fulfilling prophecy to some extent. Enough people believing in a support level makes that support real.
Rahul opens a 6-month daily chart of Nifty Bank. He notices the index has touched ~46,000 four times and bounced. He marks this as support. It has also hit ~49,500 twice and pulled back. He marks this as resistance. He doesn't know if Nifty Bank will break through resistance or fall from it, but he knows these levels are where the market has reacted in the past, so he pays attention when price approaches them.
Moving Averages: Smoothing Out the Noise
A moving average smooths price data by calculating the average closing price over a set number of periods. A 50-day MA averages the last 50 daily closing prices. As new days pass, the old ones drop off.
Two most common moving averages in India:
- 50-day MA: Medium-term trend indicator
- 200-day MA: Long-term trend indicator
Golden Cross: The 50-day MA crosses above the 200-day MA, historically a bullish signal. Many traders interpret this as a new uptrend beginning.
Death Cross: The 50-day MA crosses below the 200-day MA, historically a bearish signal.
MAs are calculated from past prices. By the time a golden cross forms, the stock may have already risen 15–20%. You're confirming a trend that's already in motion, not predicting the future. MAs are good for identifying trends and filtering noise. They're not good for timing exact entry and exit points.
RSI: Measuring Momentum
RSI is a momentum oscillator that measures the speed and magnitude of recent price changes, displayed on a scale of 0–100. RSI above 70 is considered overbought; below 30 is considered oversold.
The intuition: if a stock has risen aggressively for many consecutive days, it's likely "overbought", some correction is probable. If it's fallen relentlessly, it may be "oversold", due for a bounce.
Critical caveat: RSI works well in ranging markets (stocks moving sideways between support and resistance). In strong trending markets, stocks can stay overbought (RSI 80+) for weeks, and selling based on RSI alone will cause you to exit a rising stock too early.
RSI divergence is when price makes a new high but RSI doesn't confirm it (or price makes a new low but RSI doesn't confirm). This suggests weakening momentum. RSI divergence is considered a more reliable signal than RSI crossing 70 or 30 alone.
Volume: The Confirmation Tool
Price movement without volume is suspicious. Volume movement with price confirms conviction.
- Stock rises 5% on 3× normal volume: Strong bullish signal: real buyers, not just low-volume drift.
- Stock rises 5% on 0.3× normal volume: Suspect: could reverse easily.
- Stock falls 8% on massive volume: Potential capitulation (panic selling peak): could be near bottom.
- Stock falls 8% on low volume: Less meaningful: sellers aren't panicking.
Rahul's data science training made him appreciate this: volume is the "sample size" for price moves. Low-volume moves are like conclusions drawn from 5 data points. High-volume moves are like conclusions from 500.
VWAP: The Institutional Price Reference
VWAP (Volume Weighted Average Price) = the average price of a stock weighted by volume throughout the trading day.
Why it matters: institutional traders (mutual funds, FIIs) often measure their execution against VWAP. Buying below VWAP is considered good execution; above VWAP is poor execution.
When a stock is trading consistently above VWAP during the day, it suggests institutional buying. Below VWAP suggests institutional selling or indifference.
Candlestick Patterns: A Sample
Hundreds of candlestick patterns exist. A few of the most recognized in Indian markets:
| Pattern | What It Shows | Reliability |
|---|---|---|
| Doji | Indecision, buyers and sellers balanced | Moderate, needs context |
| Hammer | Potential reversal from downtrend | Moderate at key support levels |
| Engulfing (Bullish) | Strong buying reversal after a fall | Better than average at support |
| Shooting Star | Potential reversal from uptrend | Moderate at key resistance levels |
| Inside Bar | Consolidation, awaiting breakout direction | Better at breakout confirmation |
Every candlestick pattern has a failure rate. An engulfing bullish candle at support is just a signal, not a guarantee. Rahul the data scientist knows this: a pattern with 55% success rate is useful in large sample sizes, not in single trades. Always combine patterns with volume, trend, and context. Never trade based on patterns alone.
The Honest Truth About Technical Analysis
Rahul's data science perspective on TA, after studying it seriously:
What TA does well:
- Helps identify entry and exit levels for already-decided investments
- Excellent for position sizing (stop-loss placement)
- Useful for understanding market sentiment at extremes (very overbought/oversold)
- Essential for intraday and short-term traders who don't hold positions long enough for fundamentals to play out
What TA does poorly:
- Predicting direction with high confidence (most TA signals fail as often as they succeed)
- Giving a reason to buy: only a price reason, never a business reason
- Working in low-liquidity, thinly traded stocks (where patterns are easily manipulated)
- Surviving "black swan" events (fundamentals move markets dramatically on news; TA can't anticipate)
Rahul's approach: use fundamental analysis to decide WHAT to buy (the company and why). Use technical analysis to decide WHEN to buy (entry point, support levels, momentum confirmation). The combination is more powerful than either alone. Don't use TA to pick stocks. Use it to time your entry once you've done the fundamental work.
Key Takeaways
- Technical analysis uses price and volume history to identify patterns, trends, and potential entry/exit points
- Support and resistance levels, where price has historically reacted, are the most useful TA concept
- Moving averages smooth noise and confirm trends; they are lagging indicators (not predictive)
- RSI measures momentum; extreme readings (below 30 or above 70) signal potential reversal in ranging markets
- Volume confirms price moves: high volume signals conviction; low volume signals caution
- TA is best used for timing entries and exits after fundamental analysis has selected the stock
Combine your TA knowledge with building a long-term portfolio or understand sector analysis to complete your investing framework.
A stock Rahul follows rises 8% in one day on very low volume (0.2× its average daily volume). What should he conclude?
Disclaimer: This article is for educational purposes only and does not constitute personalized financial advice. Investments are subject to market risks. Past performance does not guarantee future returns. Please consult a SEBI-registered investment adviser before making investment decisions.