Stock MarketIntermediate

Chapter 10 of 15

Technical Analysis — Introduction

Charts, support/resistance, moving averages basics.

12 min read Chapter 10

Arjun had been investing in stocks for a year using fundamental analysis but found himself always buying at the wrong time — even great companies he bought seemed to fall further after he purchased them. A trader friend introduced him to technical analysis: studying price charts to understand momentum, support levels, and market psychology. "Technical analysis won't tell you what to buy," his friend said, "but it can help you figure out when."

What Is Technical Analysis?

Technical analysis is the study of past price movements and trading volumes to forecast future price directions. It operates on the premise that all fundamental information is already "priced in" to the stock, and that price patterns and market psychology tend to repeat themselves.

Technical analysis alone is NOT enough for long-term investing

Technical analysis is a tool for market timing and short-term trading. For long-term wealth creation (5–20 years), fundamental analysis — understanding the underlying business — remains the foundation. Use technical analysis to improve entry/exit timing on fundamentally strong stocks, not as a replacement for business analysis.

Candlestick Charts

Candlestick Chart:

A candlestick chart represents price data for a given time period (1 minute, 1 day, 1 week) visually using "candles." Each candle shows the Open, High, Low, and Close prices. A green/white candle means the close was above the open (bullish); a red/black candle means the close was below the open (bearish). The "wicks" or "shadows" show the high and low.

Candlestick patterns like Doji, Hammer, Engulfing, and Morning Star can signal potential reversals, but they must be confirmed by volume and context — a hammer at a major support level is meaningful; one in the middle of a range is not.

Moving Averages

Moving Average:

A moving average smooths out price fluctuations by calculating the average closing price over a set number of past days. The 50-day Moving Average (50DMA) and 200-day Moving Average (200DMA) are the most widely watched by institutional investors.

Example: Golden Cross and Death Cross

The most famous moving average signal:

Golden Cross: When the 50-day moving average crosses above the 200-day moving average, it signals that short-term momentum is turning positive — historically a bullish sign for a trend reversal. Many institutional funds use this as a buy signal for indices like Nifty 50.
Death Cross: When the 50-day moving average crosses below the 200-day moving average, it signals short-term price weakness is becoming a longer-term trend — a bearish signal.

Example: If TCS's 50DMA = ₹3,450 and 200DMA = ₹3,200, the 50DMA is above the 200DMA, indicating TCS is in an overall uptrend. A fundamental investor might use this confirmation to buy TCS rather than trying to catch it at an exact bottom.

Support and Resistance

Support and Resistance:

Support is a price level where a stock has repeatedly bounced upward — it represents buying interest. Resistance is a price level where the stock has repeatedly struggled to move higher — it represents selling pressure. When a resistance level is broken upward, it often becomes the new support.

For example, if Infosys has bounced from ₹1,400 three times in the past year, ₹1,400 is strong support. If it breaks below ₹1,400 on high volume with bad news, the next support might be its 200DMA or ₹1,250.

RSI — Relative Strength Index

RSI (Relative Strength Index):

RSI is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0–100. Developed by J. Welles Wilder. RSI above 70 suggests the stock is overbought (potential reversal down); RSI below 30 suggests it is oversold (potential bounce up).

RSI interpretation guide

RSI below 30 = Oversold (stock may bounce — potential buying opportunity in an overall uptrend). RSI above 70 = Overbought (stock may pull back — be cautious about buying). RSI around 50 = Neutral momentum. Important caveat: In strong uptrends, stocks can stay above RSI 70 for extended periods — don't short a stock just because RSI is 75.

MACD — A Brief Introduction

The Moving Average Convergence Divergence (MACD) indicator uses two exponential moving averages (typically 12-day and 26-day) and a Signal Line (9-day EMA of MACD). When MACD crosses above the Signal Line, it's a bullish signal; below, bearish. The MACD Histogram shows the momentum strength. On Zerodha's Kite platform, MACD is available in one click on any chart.

Technical vs Fundamental Analysis

Aspect	Technical Analysis	Fundamental Analysis
Primary User	Short-term traders, swing traders	Long-term investors
Focuses On	Price, volume, chart patterns	Earnings, balance sheet, business quality
Time Horizon	Minutes to weeks/months	Years to decades
Key Tools	Candlestick charts, RSI, MACD, MA crossovers	P/E, ROE, DCF, industry analysis
Stock Selection	Any stock with good price action	Quality businesses with strong fundamentals
Entry Signal	Moving average crossover, support/resistance	Undervaluation, margin of safety

Quick Quiz

What does an RSI reading of 75 indicate about a stock?

Key Takeaways

Technical analysis studies price charts and momentum indicators to forecast short-term price direction — it complements fundamental analysis but should not replace it for long-term investors.
The 50DMA and 200DMA are the most important moving averages — a Golden Cross (50 above 200) is bullish; a Death Cross (50 below 200) is bearish.
RSI below 30 = oversold (potential buy); RSI above 70 = overbought (be cautious) — these are tendencies, not guarantees.
Support and resistance levels identify where buying and selling interest concentrates — broken support becomes resistance and vice versa.

Ch 9: Key Financial Ratios Every Investor Must Know

Ch 11: How to Value a Stock (DCF)