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Technical analysis: theory and important signals

Technical analysis reads price, volume and derived studies to judge the direction, strength and exhaustion of a move. Indicators do not “predict”; they summarize what has already happened, so their value comes from a repeatable process: (1) identify structure, (2) confirm trend, (3) check momentum, (4) respect volatility, and (5) demand volume confirmation.

Worked example — 0700.HK, three years

The same chart the dashboard draws. Price with moving averages and Bollinger bands on top; RSI, MACD and volume in the panels below. Hover any point to read the exact values.

Preparing chart…

0. A fast, repeatable way to read any chart (60–90 seconds)

  1. Timeframe & context: What is your holding period (days vs. months), and is the market trending or ranging?
  2. Structure first: Mark the most obvious swing highs/lows and the nearest support/resistance band.
  3. Trend: Is price above or below key moving averages, and are they rising/falling?
  4. Momentum: Is RSI/MACD confirming the move or diverging?
  5. Volatility: Are bands/ATR expanding (harder stops, wider swings) or contracting (breakout risk)?
  6. Volume: Do “important” candles (breakouts, breakdowns, reversals) print with above-average volume?
  7. Plan: Define entry trigger, invalidation level (stop), and target before you click buy/sell.
Why this order matters
Indicators are derived from price/volume. If you start with indicators, you can talk yourself into trades that violate obvious structure. Start with structure, then use indicators as confirmation.

1. Candlesticks: what one bar can tell you

Most of the dashboard signals ultimately come from the same four numbers each bar carries: open, high, low, and close. The body shows open-to-close; wicks show extremes. Long wicks near a level often mean rejection; a series of large bodies in one direction often means urgency and trend continuation.

Diagram showing the anatomy of a candlestick: open, close, high, low, body and wicks.
Candlestick anatomy: bodies and wicks help you see buying/selling pressure and rejection at levels. [1]
Probe-meteo.com (CC BY-SA 3.0) — Wikimedia Commons
Common warning sign: big wick into resistance/support
A strong push into a level that closes back inside the range (long wick) is often a sign of absorption/rejection. Treat it as a warning, then look for confirmation (momentum shift, failed retest, or volume climax).

2. Market structure, support and resistance

An uptrend is a sequence of higher highs and higher lows; a downtrend is the opposite. Support is a price band where buyers repeatedly appeared, resistance is where sellers did. Levels are zones (bands), not single ticks. When a key level breaks, the most informative event is often the retest: does prior resistance hold as support (bullish), or does prior support fail as resistance (bearish)?

Example chart marking multiple support and resistance levels with green and red arrows.
Support/resistance zones: repeated reactions at horizontal bands define structure. Breaks and retests are often more meaningful than a single strong day. [2]
Jonlaw16 (CC BY-SA 4.0) — Wikimedia Commons
Typical ‘buy’ structure setup (example)
Break above resistance → pull back (retest) → hold the old level → then break the pullback high. The “signal” is not the indicator; it’s the market proving the level.
Typical ‘sell / risk-off’ structure setup (example)
Break below support → retest from below and fail → then make a lower low. Again, the key is the retest failing, not any single candle.

3. Trend — moving averages (SMA/EMA)

A moving average is a smoothing line. A simple moving average (SMA) is the mean close over a window; an exponential moving average (EMA) weights recent days more heavily, so it turns sooner. Many traders use a long-period average (e.g., 200) as a rough regime filter and shorter averages (e.g., 20/50) for pullbacks and trend continuation. [8]

Example line chart showing a shorter moving average crossing above a longer moving average with a 'buy' label.
Moving-average crossover (illustrative): a faster average crossing above a slower average is commonly read as trend improvement; crossing down is commonly read as trend deterioration. [3]
Henry Larkin (CC BY-SA 3.0) — Wikimedia Commons
SignalWhat you seeUsual reading
Golden cross50-day average crosses above the 200-dayTrend turning up; slow but often steadier
Death cross50-day crosses below the 200-dayTrend turning down; risk-off
Stacked averages10 > 50 > 200, all risingStrongest trend alignment
Pullback to the averagePrice dips to a rising 20 or 50 and holdsClassic continuation setup
Slope mattersAverage rises/falls clearlySlope = regime; flat = range and chop
Warning: moving averages are lagging
Averages confirm what already happened. In fast reversals or ranges, they can generate late entries and frequent whipsaws. Treat crossovers as trend confirmation, not as an isolated “buy” or “sell” button. [8]

4. Momentum — RSI (Relative Strength Index)

RSI is a bounded oscillator (0–100) that compares recent gains and losses (often over 14 periods). A classic reading is above 70 “overbought” and below 30 “oversold”, but extremes alone are not entries because strong trends can keep RSI elevated or depressed for long stretches. A higher-value RSI idea is divergence: price makes a new extreme while RSI fails to confirm, suggesting momentum is fading. [8]

Price chart with RSI indicator panel below showing typical RSI lines and 30/70 threshold bands.
RSI in a typical chart layout: RSI thresholds are easy to see, but the underlying trend context changes how you interpret “overbought/oversold.” [7] [8]
Ehsan shahrjerdy (CC BY-SA 3.0) — Wikimedia Commons
SignalWhat you seeUsual reading
Bullish divergenceLower price low, higher RSI lowDownside momentum exhausting; watch for reversal structure
Bearish divergenceHigher price high, lower RSI highRally losing power; watch for lower high / breakdown
50-line crossRSI moves through ~50Momentum ‘ownership’ shifting
Failure swingRSI fails to reach prior extremeEarly reversal warning (needs structure confirmation)
Example chart showing bearish divergence between price and RSI, used as a sell or warning signal.
Divergence example (warning/sell context): price continues higher while RSI trends lower. Divergence is best treated as a warning until structure breaks. [6]
Bundesstefan (CC BY-SA 4.0) — Wikimedia Commons
Practical RSI rule: use it to time, not to fight, the trend
In uptrends, RSI often finds support around mid-range levels and re-accelerates; in downtrends it can fail around mid-range levels. That’s why combining RSI with structure (break/retest) is more robust than trading “30/70” in isolation. [8]

5. Trend plus momentum — MACD

MACD is derived from the difference between two EMAs (commonly 12 and 26), plus a signal line (often a 9-period EMA of MACD). It is customarily shown with two lines and a histogram (the gap between MACD and signal). Traders often read (1) signal-line crossovers, (2) zero-line crosses, and (3) histogram expansion/contraction as momentum strengthening/weakening. [8]

Example chart with MACD indicator below showing two lines and a histogram.
MACD example with histogram: shrinking histogram bars can be an early “move is slowing” clue; the crossover is a later confirmation. [4]
Kevin Ryde (CC BY-SA) — Wikimedia Commons
SignalWhat you seeUsual reading
Bullish crossoverMACD line crosses above the signal lineMomentum turning up (best with structure break up)
Bearish crossoverMACD crosses below the signal lineMomentum turning down (best with structure break down)
Zero-line crossMACD moves above/below zeroMedium-term trend change confirmation
Histogram fadeHistogram shrinks toward zeroWarning: momentum is decelerating
MACD is a ‘trend-momentum’ tool (not a magic reversal detector)
Many false signals happen when you trade MACD crossovers inside a range. In ranges, prioritize structure boundaries + volatility contraction/expansion; in trends, MACD is more useful for “is the move still healthy?”

6. Volatility — Bollinger bands and ATR

Bollinger bands are envelopes around a moving average plotted at a standard-deviation distance, so they widen when volatility rises and tighten when volatility falls. A “squeeze” (tight bands) often precedes expansion but says nothing about direction—wait for the break and then use structure (level + retest) to avoid chasing false moves. [8]

Example chart showing Bollinger Bands around price with a middle moving average line.
Bollinger bands: the middle line is a moving average and the outer bands widen/narrow with volatility. Tight bands can precede a large move, but direction still needs confirmation. [5] [8]
Kevin Ryde (CC BY-SA) — Wikimedia Commons
Stops: use volatility, not feelings
Average True Range (ATR) is the honest way to size a stop: if your stop sits inside “normal daily noise,” you’ll be stopped out even when your idea is right. A common practice is to place stops beyond structure by some fraction/multiple of ATR—then size the position to keep risk constant. [8]

7. Volume — the confirmation most people skip

Volume is the audit trail. Breakouts on below-average volume are suspect; breakouts with strong volume are more credible. Rising price on rising volume confirms demand; rising price on falling volume warns of a thin move. Volume indicators (OBV, MFI, Accumulation/Distribution) often act as warnings via divergence rather than precise entry triggers. [8]

Warning: ‘breakout’ without participation
If price clears a well-watched level but volume is flat or declining, treat it as “needs proof.” A clean retest with renewed volume is often a higher-quality confirmation than chasing the first push.

8. Putting it together — confluence (buy/sell/warning cheat-sheet)

A robust framework asks three questions before a trade: what is the trend on the higher timeframe, does momentum agree, and does volume confirm. Two agreeing signals at a structural level beat six indicators that all repeat the same input. [8]

Buy-leaning confluence (example)
  • Price reclaims resistance and holds it on retest
  • Trend filter improves (rising MA / bullish crossover)
  • Momentum improves (RSI > ~50 or MACD histogram expands)
  • Volume expands on the breakout day or the retest
Sell-leaning confluence (example)
  • Support breaks and fails on retest from below
  • Trend filter deteriorates (falling MA / bearish crossover)
  • Momentum weakens (RSI fails at mid-range, MACD crosses down)
  • Down days show heavier volume than up days
Warnings (reduce risk / wait)
  • Divergence (price makes new extreme; RSI/MACD fails to confirm)
  • Volatility squeeze into a major level (expect expansion)
  • Breakout without volume participation
  • Indicators disagree across timeframes (daily bullish, weekly bearish)
Risk management is part of the ‘signal’
A setup is only tradable if you can place an invalidation level (stop) at a logical structure point and size the position so the loss is acceptable. If you can’t do that, it’s not a trade—just an idea.

Common mistakes: stacking correlated indicators, trading an oversold reading against a strong downtrend, ignoring the higher timeframe, and moving a stop after the fact.

References (APA 7)

Note: Many images below are Creative Commons Attribution-ShareAlike (CC BY-SA). If you adapt them, you must keep attribution + license and (for SA) share your derivative under a compatible license.

  1. Probe-meteo.com. (2013, May 12). Candlestick chart scheme 02-en [SVG image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Candlestick_chart_scheme_02-en.svg
  2. Jonlaw16. (2021, June 22). Support and Resistance [PNG image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Support_and_Resistance.png
  3. Larkin, H. (2012, April 25). Moving average crossover [PNG image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Moving_average_crossover.png
  4. Ryde, K. (2006, March 1). MACD example, fast=12 slow=26 smooth=9 [PNG image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:MACD_example,_fast%3D12_slow%3D26_smooth%3D9.png
  5. Ryde, K. (2006, February 16). Bollinger bands example, 2 stddevs [PNG image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Bollinger_bands_example,_2_stddevs.png
  6. Bundesstefan. (2021, April 30). Bitcoin RSI14 Divergence [PNG image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Bitcoin_RSI14_Divergence.png
  7. shahrjerdy, E. (2013, May 3). Rsi [PNG image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Rsi.png
  8. Fidelity Brokerage Services LLC. (2020). Understanding indicators in technical analysis [PDF]. Fidelity Investments. https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/learning-center/Understanding-Indicators-TA.pdf
  9. E*TRADE from Morgan Stanley. (2024, October 25). Understanding popular technical analysis studies. https://us.etrade.com/knowledge/library/stocks/understanding-popular-technical-analysis-studies

Educational material only, not investment advice.