Technical analysis has a bad reputation. Unfortunately, this reputation may be warranted. Many analysts don't understand its basic principles and fundamentals.

Almost any chart can illustrate some of these fundamentals and principles. The chart of Carnival Corp (NYSE:CCL) is no exception. This is why our team of technical analysts has made it our Stock of the Day.

A chart is a graphical illustration of trader and investor emotions. The price action that causes patterns to form on charts is driven by them.

If the leadership in the market is changing from bulls to bears or bears to bulls, the action can show up on a chart as a reversal pattern.

These can include Head and Shoulders, V, or rounded tops or bottoms. They suggest the trend is going to reverse and the market will head in the opposite direction.

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A Flag or Pennant is a continuation pattern. A bull flag suggests that a stock will continue its trend higher after a short break or period of consolidation.

As you can see on the chart, one may have just formed in Carnival.

Sometimes stocks get ahead of themselves. As a result, some buyers who have been driving the price higher will decide to move to the sidelines for a few days.

They think that if they leave the market and stop buying, the price will drop and they can buy the rest of their shares at a lower price in a few days. They believe their aggressive buying could have contributed to moving the price higher.

A characteristic of these buyers temporarily stepping aside is low volume. Because some of the main players aren't involved for a few days, the amount of trading declines significantly.

This is what a Flag pattern shows. The upward trend breaks and the shares move sideways. At the same time, the volume dries up.

The Flag suggests that once these buyers are done taking a break and reenter the market, Carnival will start to trend higher once again.

Photo: Ed Junkins from Pixabay