FI Pillar: Technicals
Technicals measure market structure, momentum, and breadth—how prices, volume, and volatility interact to reveal underlying strength or weakness in trends. This pillar helps investors identify turning points, confirm trends, and manage risk through data-driven signals.
Why Technicals Matter
Technical indicators reflect the collective behavior of investors and traders. They show when markets are overbought or oversold, how broad participation is, and whether momentum supports fundamentals. Even in fundamentally strong environments, poor technical structure can warn of corrections, while improving momentum often signals recovery before fundamentals catch up.
Key Metrics and Their Importance
1. Market Breadth
Why it’s important: Breadth measures how many stocks participate in a move. Strong breadth signals a healthy rally, while narrow leadership can foreshadow reversals.
Factors involved: Advance-decline line, percentage of stocks above 50-day and 200-day moving averages, and equal-weight vs. cap-weight index performance.
2. Momentum Indicators (200-DMA, RSI, MACD)
Why it’s important: Momentum indicators assess the pace and direction of price trends. They help distinguish sustainable rallies from temporary bounces.
Factors involved: Moving averages (50-, 100-, 200-day), Relative Strength Index (RSI) to gauge overbought/oversold conditions, and MACD crossovers for signal confirmation.
3. Volatility & Term Structure
Why it’s important: Volatility gauges investor uncertainty and risk appetite. A steep volatility term structure indicates stability; inverted curves can signal fear or market stress.
Factors involved: VIX levels, VIX term structure (contango vs. backwardation), realized vs. implied volatility, and VVIX (volatility of volatility).