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What is a Technical Decline?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 July 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Technical declines are situations in which a stock exhibits a downward price movement due to factors that are more technical in nature than market driven. The technical decline often takes place when the market is enjoying a period of upward movement in general. A decline of this type is the opposite of a technical rally, in which a given stock enjoys a rise in unit price while the market in general is going through a period of decline.

There are several common reasons why a stock may go through a short term technical decline. Usually the trading volume for the stock has to do a lot with the situation. When the stock is not attracting much interest but the market in general is experiencing an upward movement, the reaction is often a decline in unit price. The decline may also be created as a result of delivery conditions associated with the investment that seems to put off potential investors. Generally, a technical decline has nothing to do with the financial stability of the issuing entity, or any of the other usual economic forces that drive prices up and down in a healthy market.

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One advantage of a technical decline is that the phenomenon can create some bargains for investors. For example, an investor may watch a stock offering that is undergoing a technical decline and attempt to project how low the stock will go before it begins to rally again. By choosing to step in and purchase shares just before the price reaches the end of the downward curve, the investor will begin to enjoy a profit from the venture as soon as the stock begins to conform to the general market trend and begin an upward movement.

While purchasing stocks that are in technical decline is a great way to secure a bargain, the opportunity is usually short lived. Once others begin to notice that the outstanding shares are being purchased, the demand for the remaining outstanding shares will increase and the price will begin to rise. At some point, the stock ceases to become a bargain and the interest levels off once again. However, for investors who made the purchase while the price was in decline, the return can be quite significant.

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