Technical Analysis and Liquidity Provision

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.