Technical Decline

A technical decline is a fall in the price of a security caused by factors other than a change in the fundamental value of the security. Typically a security is said to experience a technical decline when the security or the overall market are trending upwards overall and the price dips downward based on technical factors.

Generally the connotation is that a technical decline will prove to be only a momentarily dip in demand, followed by an appreciation back to the fair market value suggested by business fundamentals.

Proponents of the efficient market hypothesis dismiss the concept of a technical decline as being inconsistent with what they see as the rational price-setting mechanisms of the stock market. These theorists contend that if the price of a security were to deviate significantly from its fundamental value, market participants would quickly recognize an opportunity for profits and buy the security, increasing its price until it returns to its fundamental value. By contrast, many other investors believe that with sufficient research, it is possible to identify temporary windows in which undervalued securities can be bought, allowing for significant gains from the return to fundamental value.

There are many different reasons for the technical decline in a securities price, but often times, it is foreshadowed by various technical indicators or chart patterns. For example, a security that's trading just above a key support level may be at risk of a breakdown if the longer term trend is bearish. Investopedia's Technical Analysis Course will show anyone how to identify these chart patterns and indicators, as well as use risk management techniques to limit losses, in over five hours of on-demand video, exercises, and interactive content.

The pillar concepts of technical analysis come from hundreds of years of financial market data. Seveal aspects of technical analysis began to appear in Amsterdam-based businessman Joseph de la Vega's accounts of the Dutch financial markets in the 17th century. In Asia, technical analysis is said to be a method developed by Homma Munehisa during the early 18th century which evolved into the use of candlestick techniques, and is today a technical analysis charting tool. 

In 1948 Robert D. Edwards and John Magee published Technical Analysis of Stock Trends, which is widely considered to be foundational thought on the discipline. It is exclusively concerned with trend analysis and chart patterns and remains in use to the present. Early technical analysis was almost exclusively the analysis of charts, because the processing power of computers was not available for the modern degree of statistical analysis.