I was initially skeptical of TA, but I think it has some merit after looking at things for a while.
If you try to figure out what the fair value of an asset or the market as a whole is, it ultimately all depends on the set of assumptions you make about things like future earnings growth, what the equity risk premium should be, what the long term risk-free rate will be, and possible risks to the market and/or company.
Change those assumptions by only a tiny fraction - well within the noise levels you can get by estimating from historical values - and those prices and/or valuations can move up and down by a large amount. For example, whether you use the 90d Tbill rate for the RFR (0.15%) or the 10-year note (1.55%) will make a big difference in your valuation.
This creates a kind of “zone of value,” within which prices may fluctuate without clearly being overvalued or undervalued. Another way to put this is that there is a “zone of value” where reasonable people whose assumptions differ by only a tiny bit are likely to find the security worth holding.
What happens in the zone of value. Do they move randomly within this zone? Perhaps, but it is also true that while a genuine random walk can go all over the place, an asset should not be able to stray too far from fair value before buying or selling pressure will push it back in. To me, this sounds like the sort of thing that can create technical channels. Within the channels it may be a random walk, but toward the edges, it no longer is purely random. Even within the channels, there may be reflections of the psychology of traders.
I don’t want to reveal too much of my mental model here, but that’s the gist of it.
The framework is not fully my own. Alexander Elder is the first person I read who used the term “zone of value.” I add my own take to that very useful view, though.