Most of what's considered stock analysis is known as fundamental analysis: the study of the company itself. But if you've determined that a company is financially sound and shows signs of the growth you're looking for, your next question is whether the stock is worth its market price. Technical analysts try to answer that question.

Technical analysis is based on data that track trading and price movements for a stock. Analysts can use this data to see how certain events have affected the demand — and therefore the price and trading volume — for a stock in the past, which may give them some insight into how the stock may behave in the future.

The price is right

Technical analysts review a stock's average rate of growth and look for aberrations, such as jumps or dips in the stock price or trading volume, to see how the market has reacted to past events. Based on previous prices, they make judgments about whether a stock's price is on its way up or down.

Aside from revealing historical patterns, technical data can also provide early evidence of current developments. For example, if today's technical data show a leap in a stock's trading volume because a big institutional investor is selling off that stock, it may be a sign that other big investors are about to follow suit.

Sam Stovall,
Chief Investment Strategist at Standard & Poor’s

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