# Technical Analysis Framework

> This reference provides the methodology for conducting objective, chart-based technical analysis of weekly price charts.

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- Author: tools-only (https://skillmd.com/u/tools-only)
- Updated: 2026-09-29
- Page: https://skillmd.com/skills/tools-only/technical-analysis-framework

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# Technical Analysis Framework

This reference provides the methodology for conducting objective, chart-based technical analysis of weekly price charts.

## Core Principles

1. **Chart-Only Analysis**: Base all analysis purely on chart data. Ignore external news, fundamental data, and market sentiment.
2. **Objectivity**: Focus on observable patterns and data rather than subjective interpretations.
3. **Weekly Timeframe**: All analysis uses weekly charts for medium to long-term perspective.
4. **Probability-Based**: Express future scenarios as probabilities rather than certainties.

## 1. Trend Analysis

### Trend Classification

**Uptrend Criteria:**
- Higher highs (HH) and higher lows (HL) pattern
- Price trading above key moving averages
- Moving averages aligned in bullish order (shorter MA > longer MA)

**Downtrend Criteria:**
- Lower highs (LH) and lower lows (LL) pattern
- Price trading below key moving averages
- Moving averages aligned in bearish order (shorter MA < longer MA)

**Sideways/Range-bound:**
- No clear higher high/low or lower high/low pattern
- Price oscillating between defined support and resistance levels
- Moving averages flat or intertwined

### Trend Strength Assessment

**Strong Trend:**
- Clear, consecutive higher highs/lows (uptrend) or lower highs/lows (downtrend)
- Minimal retracements
- Volume confirming price direction

**Weak Trend:**
- Irregular higher/lower highs and lows
- Deep retracements (>50% of prior move)
- Divergence between price and volume

**Trend Exhaustion Signals:**
- Decreasing momentum on new highs/lows
- Volume declining as trend progresses
- Extended distance from moving averages
- Candlestick reversal patterns (e.g., shooting star, hammer, engulfing)

## 2. Support and Resistance Analysis

### Identifying Support Levels

Support represents price levels where buying interest has historically prevented further decline.

**Criteria for Valid Support:**
- Price has bounced from the level at least 2-3 times
- Volume spikes during bounces
- Longer timeframe support carries more weight
- Round numbers (psychological levels) often act as support

**Support Types:**
- **Horizontal Support**: Previous lows aligning at similar price levels
- **Trendline Support**: Upward-sloping line connecting higher lows
- **Moving Average Support**: Dynamic support from key MAs (e.g., 20-week, 50-week)

### Identifying Resistance Levels

Resistance represents price levels where selling interest has historically prevented further advance.

**Criteria for Valid Resistance:**
- Price has been rejected from the level at least 2-3 times
- Volume spikes during rejections
- Previous significant highs
- Round numbers often act as resistance

**Resistance Types:**
- **Horizontal Resistance**: Previous highs aligning at similar price levels
- **Trendline Resistance**: Downward-sloping line connecting lower highs
- **Moving Average Resistance**: Dynamic resistance from key MAs

### Support/Resistance Significance

**Strong S/R Levels:**
- Tested multiple times (3+ touches)
- Long-standing (months to years)
- High volume at previous touches
- Confluence with other technical factors (Fibonacci, round numbers, moving averages)

**Weak S/R Levels:**
- Only 1-2 touches
- Recent formation
- Low volume at touches

### Support-Resistance Flip

When broken, support often becomes resistance and vice versa. This "role reversal" is a key concept:
- **Broken Support → Resistance**: After downside break, previous support acts as new resistance on retests
- **Broken Resistance → Support**: After upside break, previous resistance acts as new support on pullbacks

## 3. Moving Average Analysis

### Key Moving Averages for Weekly Charts

- **20-week MA**: Short-term trend indicator (approximately 4 months)
- **50-week MA**: Medium-term trend indicator (approximately 1 year)
- **200-week MA**: Long-term trend indicator (approximately 4 years)

### Moving Average Interpretations

**Price Position Relative to MAs:**
- **Above all MAs**: Strong bullish structure
- **Below all MAs**: Strong bearish structure
- **Between MAs**: Transitional phase, trend unclear

**Moving Average Crossovers:**
- **Golden Cross**: 20-week MA crosses above 50-week MA (bullish signal)
- **Death Cross**: 20-week MA crosses below 50-week MA (bearish signal)

**Moving Average Slope:**
- **Rising MAs**: Bullish momentum
- **Falling MAs**: Bearish momentum
- **Flat MAs**: Consolidation, lack of directional momentum

**Moving Average as Support/Resistance:**
- In uptrends, MAs (especially 20-week and 50-week) often provide dynamic support
- In downtrends, MAs often provide dynamic resistance
- Repeated bounces or rejections from MA increase its significance

### Moving Average Confluence

When multiple MAs cluster together or align:
- **Bullish Alignment**: 20-week > 50-week > 200-week (all rising)
- **Bearish Alignment**: 20-week < 50-week < 200-week (all falling)
- **Compressed/Converging MAs**: Often precedes significant directional move

## 4. Volume Analysis

Volume confirms the strength or weakness of price movements.

### Volume Interpretation Principles

**Volume Confirms Price:**
- **Rising prices + Rising volume**: Healthy uptrend, strong buying
- **Falling prices + Rising volume**: Healthy downtrend, strong selling
- **Rising prices + Falling volume**: Weak uptrend, lack of conviction
- **Falling prices + Falling volume**: Weak downtrend, selling exhaustion possible

### Key Volume Patterns

**Volume Spikes:**
- **At Support**: High volume bounce suggests strong buying interest (bullish)
- **At Resistance**: High volume rejection suggests strong selling interest (bearish)
- **On Breakout**: High volume breakout validates the move
- **Low Volume Breakout**: Often leads to failed breakout (false signal)

**Volume Trends:**
- **Increasing Volume in Trend Direction**: Confirms trend strength
- **Decreasing Volume in Trend Direction**: Warns of potential trend exhaustion
- **Volume Climax**: Extremely high volume often marks trend extremes (capitulation or euphoria)

**Volume Divergence:**
- **Bullish Divergence**: Price making new lows but volume declining (selling exhaustion)
- **Bearish Divergence**: Price making new highs but volume declining (buying exhaustion)

## 5. Chart Patterns and Candlestick Analysis

### Reversal Patterns

**Bullish Reversal:**
- **Hammer**: Long lower wick, small body at top, appears at support
- **Bullish Engulfing**: Large green candle fully engulfing previous red candle
- **Morning Star**: Three-candle pattern (down, small, up)
- **Double/Triple Bottom**: Price tests support 2-3 times then reverses

**Bearish Reversal:**
- **Shooting Star**: Long upper wick, small body at bottom, appears at resistance
- **Bearish Engulfing**: Large red candle fully engulfing previous green candle
- **Evening Star**: Three-candle pattern (up, small, down)
- **Double/Triple Top**: Price tests resistance 2-3 times then reverses

### Continuation Patterns

**Bullish Continuation:**
- **Bull Flag**: Consolidation after strong move up, then breakout higher
- **Ascending Triangle**: Higher lows with flat resistance, breaks up

**Bearish Continuation:**
- **Bear Flag**: Consolidation after strong move down, then breakdown
- **Descending Triangle**: Lower highs with flat support, breaks down

### Pattern Significance

Patterns carry more weight when:
- Forming at key support/resistance levels
- Accompanied by appropriate volume (high on breakout)
- Confirmed by moving averages and trend structure
- Occurring on longer timeframes (weekly > daily)

## 6. Scenario Development and Probability Assignment

### Scenario Development Process

For each chart analysis, develop 2-4 potential scenarios:

1. **Base Case Scenario**: Most likely outcome based on current chart structure
2. **Bull Case Scenario**: Optimistic scenario if key resistance breaks
3. **Bear Case Scenario**: Pessimistic scenario if key support breaks
4. **Alternative Scenario** (optional): Lower probability but plausible outcome

### Probability Assignment Framework

Assign probabilities based on:

**High Probability (50-70%):**
- Scenario aligned with current trend
- Multiple confirming factors (trend, S/R, MA, volume)
- Recent price action supports scenario
- Clear invalidation level

**Medium Probability (25-45%):**
- Scenario requires trend change or major breakout
- Some supporting factors but not all
- Depends on key level holding/breaking

**Low Probability (5-20%):**
- Scenario contrary to most technical factors
- Requires significant shift in structure
- Limited supporting evidence but technically possible

### Probability Assignment Example

Current Structure: Uptrend, above all MAs, holding support

- **Bull Case (60%)**: Continuation higher after pullback to support
  - Reasoning: Trend intact, holding key support, volume confirming

- **Base Case (30%)**: Consolidation/range before next move
  - Reasoning: Approaching resistance, some profit-taking visible

- **Bear Case (10%)**: Break below support, trend reversal
  - Reasoning: No clear reversal signals yet, but always possible

**Note**: Probabilities should sum to 100%. Adjust based on strength of supporting factors.

### Invalidation Levels

For each scenario, define a specific price level that would invalidate it:
- **Bull Scenario Invalidation**: Break below key support
- **Bear Scenario Invalidation**: Break above key resistance
- **Base Case Invalidation**: Breakout from range in either direction

## 7. Analysis Structure and Discipline

### Analysis Checklist

For each chart, systematically evaluate:

1. ✓ **Current Trend**: Identify direction, strength, and duration
2. ✓ **Support Levels**: Mark significant horizontal and dynamic support
3. ✓ **Resistance Levels**: Mark significant horizontal and dynamic resistance
4. ✓ **Moving Averages**: Note position, slope, and crossovers
5. ✓ **Volume Pattern**: Assess if volume confirms or contradicts price
6. ✓ **Chart Patterns**: Identify any significant patterns forming or completing
7. ✓ **Scenarios**: Develop 2-4 scenarios with probability estimates
8. ✓ **Invalidation Levels**: Define what would negate each scenario

### Objectivity Reminders

- Avoid confirmation bias: Consider both bullish and bearish scenarios
- Let the chart speak: Don't force patterns or signals
- Update analysis as new data emerges: Charts are dynamic
- Admit uncertainty: Not every chart provides clear signals
- Focus on probabilities, not predictions: No scenario is 100% certain

### Common Pitfalls to Avoid

- **Overcomplicating**: Too many indicators can lead to analysis paralysis
- **Ignoring Volume**: Price without volume is incomplete picture
- **Forcing Patterns**: Seeing patterns that aren't clearly there
- **Disregarding Timeframe**: Weekly chart may differ from daily
- **Neglecting Context**: Each chart in isolation, but overall market matters
- **Being Too Certain**: Markets are probabilistic, not deterministic