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.