Technical analysis matters, but its limitations are important to recognize – JP Morgan

Technical analysis is a method of evaluating financial assets using mathematical calculations based on prices, trading volumes or open interest in futures and options. Does technical analysis matter? Economists at JP Morgan analyze the technical aspects of market forecasting.

Technical indicators have been reliable signals for short-term market performance

The issue with technical analysis is that while it can be very effective at predicting daily performance, it is less helpful when looking out into the more distant future. For that, fundamentals are much more effective: for example, S&P 500 forward valuations alone have historically explained almost a third of subsequent five-year annualized returns.

As a result, professional day traders may benefit more from technical analysis, whereas long-term investors will see more fruitful results by relying on fundamentals. In other words, technical analysis matters, but its limitations are important to recognize.