When a market undergoes distribution and moves into stage 4 (decline), fear has a tendency to take over. When fear takes hold of a market fundamentals (balance sheets, eps, sales growth, etc.) begin to give faulty signals or make you think that overall direction has not changed. When fundamentals break down, in order to place winning trades you have to look to technical indicators and patterns.
Technical analysis is all about market psychology. Most technical "levels" and indicators reflect what people think about the chart they are looking at. For example, you can look at any candlestick pattern and there is a psychological reason why it forms. Look at the so called "hammer" formation:
"after a sell-off is abated and the market returns to, or near, its high for the day. The failure of the market to continue the selling reduces the bearish sentiment, and most traders will be uneasy with any bearish positions they might have." -
CANDLESTICK CHARTING EXPLAINED- Gregory L. Morris.
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