Editor's note: This story was originally written going into 2023 and has been added to our CNBC Pro white paper vault. Navigating the markets can be difficult these days. A volatile market backdrop post-pandemic is becoming the norm, making it hard to decide when to buy or sell a stock. However, investors can use technical analysis, the study of chart patterns on securities, to make better buying and selling decisions. Technical analysis involves looking at factors such as price and trading volume rather than fundamentals. Technicals can help investors pick out good entry points into a stock, or figure out when to pare exposure to an asset. There are hundreds of technical indicators investors can use. Here, we'll break down the following: • Breakouts • Moving averages • Fibonacci retracements • Relative strength index • Volume Let's take a look. BREAKOUTS Breakouts happen when, for example, a stock moves above a resistance level or below a support level. When one of these happens, it signals that the stock could continue moving in the direction of said breakout. Here's one example of an upside breakout in Netflix. Netflix traded roughly between the $249 and $213 levels from late July 2022 to midOctober 2022. On Oct. 18, 2022, the stock broke above that resistance level and continued ripping higher. The most important part in finding potential breakouts is identifying the support and resistance levels. One way to do this is by finding certain levels a stock tries to break above (or below) but fails to do so. The more that level holds, the more important it is. Why does this work? These levels often represent price areas where many traders bought or sold with success, or have preset trades triggered to be executed at those levels. In the case of Netflix, selling it at $249 paid off for months. Once it broke that level significantly, a whole group of traders had to rethink their stance on Netflix and may have decided to buy more of the stock, adding fuel to the breakout. To be sure, this is not an exact science, and levels can vary from one trader to the other. Regardless, these tools can be good to figure out when to add exposure to a stock — or when to book some gains. MOVING AVERAGES Another technical indicator investors can use is the daily moving average of a stock. What is this? It's simple: It's the average closing price of a security over a certain period. The most commonly used moving averages are the 50-, 100- and 200-day ones. One big advantage these technical indicators have is they provide clearer support and resistance levels. Let's take a look at Exxon Mobil and its corresponding moving averages. The 50-day average is shown in pink; the 100-day in yellow; and the 200-day in blue. There, you can see the stock found some support at its 200-day moving average in late September 2022 before popping above its 100-day and 50-day levels. From late February to early March 2023, however, Exxon shares have faced resistance at their 50-day average while getting support around its 100-day. Moving averages are also used to identify short-, medium- and long-term trends for securities. For example, the Exxon chart above shows a positive long-term trend for the stock, based on its 200-day moving average. Meanwhile, the 50- and 100-day averages suggest the stock has been stagnant in the near and medium term. FIBONACCI RETRACEMENT Fibonacci retracement levels can also be incorporated into an investor's decision-making process. These are percentage lines that delineate possible support and resistance levels between two extreme points in a chart. The typical retracement levels tracked by technical analysts are: 100%, 78.6%, 61.8%, 50%, 38.2%, 23.6% and zero. These percentages are based off the mathematical relationship within a Fibonacci sequence, in which the following number is the sum of the two previous ones. They were developed by Italian mathematician Fibonacci. Take a look at this one below, which encompasses the S & P 500's all-time high in January 2022 and the bear market low reached in October of the same year. The chart shows that, after breaking below all of those other retracement levels, the S & P 500 was able to find some support around the 23.6% level in late 2022 and the early part of January 2023. The index later struggled around the 38.2% level after briefly testing the 50% mark. RELATIVE STRENGTH INDEX Trying to figure out if investors are piling into a stock? The relative strength index can help. The RSI measures the speed and magnitude of a security's price move over 14 days, allowing for investors to gauge whether it is overbought or oversold. A stock with a 14-day RSI greater than 70 is considered overbought, signaling it may be time to reduce exposure. A stock with a 14-day RSI lower than 30, meanwhile, is considered oversold and indicates a potential buying opportunity. Take a look at this one-year chart of First Solar. The white line on the lower half shows its 14-day RSI. At this point in time, First Solar investors may want to trim their positions in the stock since its relative strength index is solidly above 70. To be sure, the stock could continue rising until, theoretically, its RSI hits 100, the technical indicator is still helpful to look at when assessing whether to trim a position. TRADING VOLUME Trading volume is one of the most useful tools investors can use to gauge a stock move. Volume refers to the number of shares traded over a determined time period. Tracking volume and changes in trading activity can allow you to measure the amount of investor enthusiasm behind a move. When a stock falls sharply, and that move is accompanied by high trading volume, it points to conviction from investors that the near-term trend may be to the downside. However, if a stock falls and volume is light, then that could be an indication that the downturn will only be fleeting. Take a look at this MongoDB chart. The top half of the chart shows a sharp drop in the share price toward the right-hand side. On the bottom half, you can see a sharp volume spike — signaling a potential trend shift for the stock. Trading volume can be used to gauge moves in the broader market too, as the same principles apply. BOTTOM LINE No technical indicator is perfect, but they can help even the most fundamental-focused investors in their decision-making process. The key for investors is finding which of these works best for them.
