What is Technical Analysis? A Beginner's Guide for South African Traders

Walk into any JSE proprietary trading desk after 5pm and the screens tell the same story: candles, moving averages, a few lines drawn by hand. For a discipline that started in 1880s rice markets and was dismissed for most of the 20th century as chart-reading mysticism, technical analysis has quietly become the default language of short-term flow on every major exchange, Johannesburg included.

This piece traces what technical analysis actually does, where the evidence supports it, and where the marketing has run ahead of the data.

The premise, stripped of jargon

Technical analysis rests on one claim: that the price of a share already contains everything that is publicly known about it, the earnings, the rumours, the political risk, the rand move, and that the way price moves from here reveals the balance of conviction between the people putting capital at risk. Charts, in this view, are not a forecast. They are a transcript.

The most common building blocks are unchanged from Charles Dow's original Wall Street Journal editorials: trend (is the sequence of highs and lows rising, falling or flat?), support and resistance (where has the share repeatedly turned?), and volume (was the move backed by real money?). Everything else, RSI, MACD, Bollinger Bands, Ichimoku clouds, is a derivative of those three.

What the academic record actually says

The literature is more nuanced than either side admits. A widely cited 1992 study by Brock, Lakonishok and LeBaron found that simple moving-average rules generated returns above buy-and-hold on the Dow between 1897 and 1986, and crucially that the result survived bootstrap tests. Later work by Bessembinder and Chan extended the finding to Asian markets, and by Lo, Mamaysky and Wang (2000) applied formal pattern recognition and concluded that several classical chart shapes do carry statistical information.

The counter-evidence is just as serious. After trading costs and once data-snooping bias is corrected (Sullivan, Timmermann and White, 1999), the edge in US equities largely disappears for the period after 1986. The honest reading: technical signals contain information, but the information is fragile, regime-dependent, and often consumed by friction.

Why the JSE is a useful laboratory

The Top 40 sits in an unusual sweet spot. It is liquid enough that a chart is not distorted by a single retail order, but small enough , total turnover roughly R25 to 30 billion a day across the JSE, that institutional flow and offshore sentiment leave visible footprints. Resource counters in particular respond to commodity prices that themselves trade on technicals around the clock, which makes the feedback loop tighter than in many developed markets.

The tools that actually get used

• Moving averages. The 50-day and 200-day are the two most-watched lines in global markets. A "golden cross" (50 crossing above 200) and "death cross" (the reverse) are reported on Bloomberg precisely because so many systematic funds key off them, making the signals partially self-fulfilling.
• Support and resistance. Often clusters at round numbers (the FTSE/JSE Top 40 around 70 000, 80 000), prior swing highs, and previous gap fills. Stops accumulate just beyond these levels, which is why breakouts can move violently.
• Volume. A breakout on weak volume is the most reliable false signal in the book. Real conviction shows up in the tape.
• Momentum oscillators (RSI, MACD). Useful for flagging stretched moves; routinely abused by beginners who treat "overbought" as a reason to act against a strong trend.

What technical analysis is not

It is not prediction. Every chart-based framework that claims a hit rate above roughly 60% on liquid markets has, on investigation, either cherry-picked the sample, ignored transaction costs or quietly redefined a "win". The genuine value of charting is much smaller and much more useful: it imposes a discipline of pre-defined risk. A trader who marks support and decides in advance where they will be wrong is doing the one thing the academic literature consistently shows separates survivors from blow-ups.

Pairing the chart with the company

Practically every institutional desk on the JSE combines a fundamental view of the business with a technical view of the tape. The combination is covered in our companion piece on fundamental versus technical analysis and in the deeper fundamental analysis explainer. For a sober read on what can still go wrong even with both lenses, see our piece on JSE Top 40 trading risk.