Which statement best defines technical analysis?

• A. A method of evaluating a stock's fundamental value using earnings and assets.
• B. A method of predicting stock trends over the near term based on current price trends and their relationship to prior trends, using charts of price movements.
• C. A method of forecasting interest rates using macroeconomic indicators.
• D. A method of assessing a company's credit risk.

Answer: (B)

Technical analysis focuses on price movements and trading volume to forecast near-term price directions. It uses charts to identify patterns and to compare the current price trend with prior trends, looking for continuations or reversals. Because it relies on historical price action rather than a company's fundamentals, it isn’t about evaluating intrinsic value from earnings or assets. It also doesn’t involve forecasting macro variables like interest rates or assessing a company’s credit risk. For example, a breakout above a resistance level or a moving-average crossover might suggest the near-term price could continue higher, based on the observed price pattern and its relationship to past trends.