What is technical analysis?
Technical analysis (TA) is the study of historical prices and volumes to anticipate a stock's future movements. It rests on three premises:
- The market discounts everything — the price reflects all available information (fundamental, macro, sentiment).
- Prices move in trends — a trend tends to continue until a clear reversal signal appears.
- History repeats itself — chart patterns recur because human behaviours (fear, greed) are recurrent.
TA does not predict the future — it manages probabilities and risks. A technical signal indicates a statistically favourable configuration, not a certainty.
Caution on small caps: with daily volumes of €50,000-200,000, a single institutional order can break a support or pierce a resistance for no fundamental reason. Use TA to fine-tune timing, never as the sole basis for a decision.
Support and resistance
Support and resistance are the most fundamental levels in technical analysis:
- A support is a price level where historical demand is strong — the price often bounces as it approaches that level. It is a buying zone.
- A resistance is a level where supply is strong — the price stalls and pulls back. It is a selling zone.
When a support is broken to the downside on volume, it often becomes resistance (a pullback). When a resistance is broken to the upside on volume, it often becomes support. This is the principle of support/resistance inversion.
Japanese candlesticks
Japanese candlesticks represent in a single candle the four essential pieces of information for a session: open, high, low, close.
Volumes — the most reliable signal
On small caps, volumes are often the most reliable indicator. A price move without unusual volume is suspect — it may be the work of a single operator. A move with high volumes (2-3× the average) indicates broader participation and therefore a greater probability of continuation.
| Volume/price configuration | Interpretation |
|---|---|
| Rise + high volumes | Confirmation — many buyers, solid momentum |
| Rise + low volumes | Caution — a move with little follow-through, reversal risk |
| Fall + high volumes | Strong selling pressure — downtrend confirmed |
| Fall + low volumes | Opportunistic selling — few sellers, possible rebound |
| Isolated volume spike | Exhaustion — often a reversal signal |
Recommended TA workflow on small caps
The most effective method combines fundamental and technical analysis in sequence:
- Select with the ML screener (composite score ≥ 60) — the fundamentals validate quality
- Check the Momentum pillar (RSI, MA50/MA200, relative performance) — the macro-level TA is already computed
- Identify the key levels on the daily/weekly chart — entry support and target resistance
- Check the volumes — is the next move likely to be confirmed?
- Set the stop loss — just below the entry support (see the Kelly criterion guide for sizing)