Here is my opinion on the merits of technical analysis. I don't mean any disrespect to anyone who chooses to use technical analysis, but just want to put my opinion out. I have been working in the finance industry for 25 years, and I do not know anyone that is making out-sized returns using technical analysis.

I feel that technical analysis encourages excessive trading and the frictional transaction costs that it creates cuts into any profit that is made. But more important, over short periods of time, stock prices tend to follow a random walk or Brownian motion. Over longer periods of time, time-series of prices look more like a Brownian motion with a drift component. If we make the assumption that prices do indeed follow a Brownian motion, then you cannot predict future price changes based on previous price changes.

If you want to get comfortable with this concept, you can use a spreadsheet to simulate a random Brownian path. When you graph the time series of the Brownian motions, you will see patterns, but by definition, these patterns cannot be predicted.

If you believe in technical analysis, then you believe that stock prices do not follow a random walk. The reality is that prices do not follow a Brownian motion exactly, but my opinion is that it is very difficult to profit from any predictable component of price change that may exist.

If you want to try simulating some random paths, you can download a simple spreadsheet that I wrote from https://docs.google.com/file/d/0B3faQpLOiHylbUtXc1RNaGJEQ00/edit?usp=sharing and try it yourself. Keep in mind that the paths that are generated from this spread sheet are random and that it is impossible to predict any movements by looking at the prior movements.

Despite the randomness of stock price movements, if enough people believe in technical analysis, the results become self fulfilling. Once a pattern is noticed (even if it is random), if many people believe that the pattern implies a future upward price movement, they will bid the price up. A problem then exists if you buy while the price is being bid up without fundamental information causing the price movement; the price should revert to the price that is supported by the fundamentals. You will have over paid, unless you were the first person to buy based on the observed pattern.