Technical Analysis and Liquidity Provision

Rodney L. White Center for Financial Research Working Paper No. 11-02

48 Pages Posted: 25 Jul 2002

See all articles by Elizabeth R. Odders-White

Elizabeth R. Odders-White

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Kenneth A. Kavajecz

Edgewood College; Phoenix Rising Advisory

Abstract

The apparent conflict between the level of resources dedicated to technical analysis by practitioners and academic theories of market efficiency is a long-standing puzzle. We offer an alternative explanation for the value of technical analysis that is consistent with market efficiency - specifically, that it reveals information about liquidity provision. We find evidence consistent with the hypotheses that support and resistance levels coincide with peaks in depth on the limit order book and that moving average forecasts reveal information about the relative position of depth on the book. These results demonstrate that technical analysis can have value even in an efficient market, and provide a practical method for estimating the level of liquidity on the book.

Suggested Citation

Odders-White, Elizabeth R. and Kavajecz, Kenneth A., Technical Analysis and Liquidity Provision. Rodney L. White Center for Financial Research Working Paper No. 11-02, Available at SSRN: https://ssrn.com/abstract=315660 or http://dx.doi.org/10.2139/ssrn.315660

Elizabeth R. Odders-White

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-1254 (Phone)
608-265-4195 (Fax)

Kenneth A. Kavajecz (Contact Author)

Edgewood College ( email )

1000 Edgewood College Dr.
Madison, WI 53711
United States
6087704677 (Phone)

Phoenix Rising Advisory ( email )

519 NORTH PINCKNEY STREET
MADISON, WI 53703
United States
6087704677 (Phone)

HOME PAGE: http://www.pr-advisory.com

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