Technical analysis constitutes an alternative approach to trading than that provided by arbitrage and fundamental analysis. The underlying rationale for technical analysis is that markets are human systems and that prices of instruments traded in these markets are determined to a large extent by mass psychology.
Fundamental equity analysts work alongside economists and technical analysts. They respect the methods used by economists while retaining a healthy skepticism about their forecasts. Most are duty bound to mistrust the methods used by technical analysts but, if they are honest, accord their conclusions with a degree of respect. A fundamental analyst will hesitate before putting out a report advocating a strong buy on a stock where the technical analyst says that technical indicators are strongly indicative of a likely sharp stock correction. Among the features of technical analysis are the following:
 Prices move in cycles, and in cycles within cycles. Prices move in a series of “waves” and trends can be distinguished from cyclical effects. Specific price levels can be identified that act as resistance levels (for rising prices) or as support levels (for falling prices).
Identifiable patterns can be recognized in prices tracked over time and likely turning points can be identified in advance.
Specific factors that technical analysts take into account are:
The current market price versus moving averages of prices over defined time intervals, typically 30 days, 90 days, 180 days and one year.
Daily opening and closing prices and intra-day highs and lows. Charts showing these are referred to as “candlestick” charts by virtue of their appearance.
Trading volumes and whether these are rising or falling.
Technical analysis is diametrically opposed to widely accepted mainstream dogma on market efficiencies which claim that in efficient markets price changes are essentially random and that it is impossible to predict future prices from historic prices.
Technical analysis is better at explaining past price behavior than predicting future price movements (isn’t that always the way). It is easier to see price patterns with the benefit of hindsight and most forecasts are qualified in some way. A support level, for example, may be tested. If the support level is breached then technical analysis can be used to identify the next support level. If on the other hand it is tested but fails to break the support level this may lead to a new resistance level. If technical analysis provided a guaranteed way to make money then there would be more technical analysts working for their own account and less employed by brokerages and speculators.
Most financial academics studiously avoid any mention of technical analysis, treating it much as scientists would treat alchemy. A variation on Shakespeare comes from David Mamet, an American dramatist: “The poker player learns that sometimes both science and common-sense are wrong; that the bumblebee can fly; that, perhaps one should never trust an expert; that there are more things in heaven and earth than are dreamt of by those with an academic bent.”