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Advanced Financial Management · Security Analysis

Technical Analysis and Charts for CA Final AFM

Updated 5 October 2026 · Fact-checked

Technical analysis forecasts future price direction from past prices and volumes, using charts and indicators such as Dow Theory, support and resistance, moving averages and RSI. To solve a question, identify the tool asked, compute the indicator from the data given, read the signal (buy, sell or hold) and state it with the reason.

Understand Technical Analysis and Charts

Technical analysis studies past market prices and trading volumes to predict where the price will go next. It does not ask what a share is worth. It asks what the market is doing and whether that behaviour will continue.

The idea rests on three assumptions. Price reflects all available information. Prices move in trends that tend to persist. History tends to repeat itself because investor behaviour repeats. If you accept these, a chart becomes a map of demand and supply.

The key difference from fundamental analysis: fundamental analysts estimate intrinsic value from earnings, assets, industry and economy, and compare it with market price. Technical analysts ignore intrinsic value and use price and volume only. Technical analysis is mostly short to medium term. Fundamental analysis is mostly medium to long term. Technical analysis conflicts with the weak form of the Efficient Market Hypothesis, which says past prices cannot help you earn extra returns.

Dow Theory is the base of chart reading. It says the market has three movements: the primary trend (lasting from one year to several years, a bull or bear market), the secondary trend (a correction against the primary trend, lasting weeks to months) and minor movements (daily noise). A bull market has three phases: accumulation, public participation and distribution. Dow Theory also says the averages must confirm each other, volume must confirm the trend, and a trend continues until a clear reversal signal appears.

Support is a price level where buying demand is strong enough to stop a fall. Resistance is a level where selling is strong enough to stop a rise. When price breaks resistance, it often becomes the new support, and the reverse for a broken support. Chart patterns such as head and shoulders, double top, double bottom, triangles and flags show reversal or continuation. Candlestick charts show open, high, low and close for each period in one bar. The body is the gap between open and close. The thin lines (shadows) show high and low.

Moving averages smooth prices to show the trend. RSI and other oscillators show whether a rise or fall has gone too far. Use them as signals, not as certainties.

Key rules to remember

Simple moving average (n periods)
SMA = (P1 + P2 + ... + Pn) ÷ n
Each price has equal weight. Drop the oldest price and add the newest as you move forward.
Exponential moving average
EMA today = (Price today × k) + (EMA yesterday × (1 − k)), where k = 2 ÷ (n + 1)
Gives more weight to recent prices, so it reacts faster than SMA. Use the given first EMA, or SMA, as the starting value.
Relative Strength (RS)
RS = Average gain ÷ Average loss
Averages are over the chosen period (commonly 14). Losses are taken as positive numbers.
Relative Strength Index
RSI = 100 − [100 ÷ (1 + RS)]
Ranges from 0 to 100. Commonly above 70 is read as overbought and below 30 as oversold.
Rate of change / momentum
ROC = [(Price today − Price n periods ago) ÷ Price n periods ago] × 100
Positive means upward momentum. A fall in ROC while price rises warns of weakness.
Moving average crossover rule
Short MA crosses above long MA = buy; short MA crosses below long MA = sell
Also: price crossing above its moving average is a buy signal and below is a sell signal.
Dow Theory trend rule
Higher highs and higher lows = uptrend; lower highs and lower lows = downtrend
A trend is assumed to continue until a clear reversal is confirmed.

How to solve Technical Analysis and Charts questions

Use this order for any question on technical analysis, whether numerical or descriptive.

  1. 1Read the question and note which tool is asked: Dow Theory, pattern, moving average, RSI, ROC or a candlestick.
  2. 2List the data given: prices, period length, starting averages and any volume figures.
  3. 3Calculate the indicator step by step. For SMA, add and divide. For RSI, find average gain and average loss first, then RS, then RSI.
  4. 4Compare the result with the benchmark: price versus moving average, short versus long average, or RSI versus 70 and 30.
  5. 5State the signal clearly: buy, sell or hold, and say whether it points to a continuing trend or a reversal.
  6. 6Give the reason in one line, for example 'RSI is above 70, so the stock is overbought and a fall is likely'.
  7. 7Add a short caution that technical signals are probabilistic and should be confirmed with volume or another indicator.

Quickest way: Calculate, compare, conclude

When to use it: Use this for numerical questions with a few data points and a fixed time limit of a few minutes.

  1. Write the formula in one line before putting any numbers in.
  2. Compute only the values the question needs. For SMA, compute just the latest averages needed for the crossover.
  3. Round only at the final step to avoid reconciliation errors.
  4. Write the benchmark (70 or 30 for RSI, crossover for averages) next to your answer.
  5. End with a one-line signal such as 'Sell: short average has fallen below long average'.

Common mistakes in Technical Analysis and Charts

  • Treating technical and fundamental analysis as the same thing, or saying technical analysis finds intrinsic value.

    Both are under the heading of security analysis, so the purpose gets blurred.

    Fix: Remember: fundamental analysis finds value; technical analysis reads price and volume to time the trade.

  • Using a negative number for average loss in the RS formula.

    Students keep the sign of the price fall.

    Fix: Take the size of each loss as a positive figure, then divide average gain by average loss.

  • Dividing total gains by only the number of gain days (and losses by only the loss days) instead of the full RSI period.

    Days with no gain or no loss are ignored by mistake.

    Fix: Divide the sum of gains by the full period length, and the sum of losses by the same period length. Days with no gain count as zero gain, and days with no loss count as zero loss. When both averages use the same period, the common divisor cancels, so RS equals total gains ÷ total losses. Using different divisors for gains and losses breaks this and gives a wrong RS and RSI.

  • Reading RSI above 70 as a certain sell signal.

    Rules of thumb are memorised as laws.

    Fix: Say it indicates an overbought condition and a possible fall. In a strong uptrend RSI can stay high for long.

  • Mixing up support and resistance, or forgetting that a broken level can switch roles.

    Both words describe price barriers, so students swap them.

    Fix: Support is a floor under price. Resistance is a ceiling above price. After a breakout, the old ceiling can become the new floor.

  • Describing the three Dow Theory trends in the wrong order or time frame, or leaving out confirmation by volume.

    Students memorise the names without the duration and role of each.

    Fix: Learn them as primary (long), secondary (correction, weeks to months), minor (days). Add that volume should confirm the trend.

Worked examples

Example 1

The closing prices of a share on five consecutive days are ₹100, ₹104, ₹108, ₹102 and ₹106. An analyst uses a 3-day simple moving average. The share closes the sixth day at ₹110. Compute the 3-day moving averages ending on days 3, 4, 5 and 6, and state the signals from day 3 to day 6 using the price-versus-average rule.

Show the solution
  1. Day 3 average = (100 + 104 + 108) ÷ 3 = 312 ÷ 3 = ₹104.00.
  2. Day 4 average = (104 + 108 + 102) ÷ 3 = 314 ÷ 3 = ₹104.67.
  3. Day 5 average = (108 + 102 + 106) ÷ 3 = 316 ÷ 3 = ₹105.33.
  4. Day 6 average = (102 + 106 + 110) ÷ 3 = 318 ÷ 3 = ₹106.00.
  5. On day 3 the price of ₹108 was above the average of ₹104.00, so the price started above its moving average.
  6. On day 4 the price of ₹102 fell below the average of ₹104.67. The price crossed below its moving average, which is a sell signal.
  7. On day 5 the price of ₹106 was above ₹105.33. The price crossed back above its moving average, which is a buy signal triggered that day.
  8. On day 6 the price of ₹110 is still above the average of ₹106.00, so the buy signal remains in force and shows an upward trend.

Answer: 3-day averages: ₹104.00, ₹104.67, ₹105.33 and ₹106.00. Price was above its average on day 3, fell below it on day 4 (sell signal) and crossed back above it on day 5 (buy signal). The buy signal is still in force on day 6, indicating an uptrend.

Example 2

Over the last 5 days a share showed these daily price changes: +₹4, −₹2, +₹6, −₹3, +₹5. Using a 5-day period and simple averages of gains and losses, compute the RSI and interpret it using the 70 and 30 benchmarks.

Show the solution
  1. Gains are 4, 6 and 5. Total gains = ₹15.
  2. Losses are 2 and 3. Total losses = ₹5.
  3. Average gain = 15 ÷ 5 = ₹3. Average loss = 5 ÷ 5 = ₹1.
  4. RS = 3 ÷ 1 = 3.
  5. RSI = 100 − [100 ÷ (1 + 3)] = 100 − 25 = 75.
  6. RSI of 75 is above 70, so the share is in the overbought zone.

Answer: RSI = 75. It is above 70, so the share is overbought and a price correction is possible. A cautious investor would avoid fresh buying and look for confirmation from volume or another indicator before selling.

Exam tips

  • For numerical questions, show the formula, the working and a one-line signal. Marks are given for all three.
  • In theory answers, write the difference between technical and fundamental analysis in two columns of points: basis, data used, time horizon and objective.
  • Learn Dow Theory as a short list: three trends, three phases of a bull market, and confirmation by averages and volume.
  • If the question does not state the RSI benchmark, use 70 and 30 and say that you are using the commonly accepted levels.
  • Link technical analysis to the Efficient Market Hypothesis in a line or two. Examiners like the point that weak-form efficiency challenges technical analysis.

Practice questions from Security Analysis

Technical Analysis and Charts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Technical Analysis and Charts: frequently asked questions

What is the main difference between technical and fundamental analysis?

Fundamental analysis estimates the intrinsic value of a share from earnings, assets and the economy. Technical analysis uses past price and volume to forecast the next price move. Fundamental analysis suits long-term investing, while technical analysis is used mainly for timing entry and exit.

What are the three trends in Dow Theory?

The primary trend is the main long-term movement lasting a year or more. The secondary trend is a correction against it lasting weeks to months. Minor trends are short daily fluctuations.

How do I read RSI in the exam?

Compute RS as average gain divided by average loss, then RSI as 100 − 100 ÷ (1 + RS). A value above 70 is commonly read as overbought and below 30 as oversold. State it as a likely signal, not a certainty.

How is a candlestick read?

Each candle shows the open, high, low and close for one period. The body spans the open and close, and the thin shadows show the high and low. A close above the open is usually drawn as a bullish candle and a close below the open as a bearish candle.