Technical Analysis and Liquidity Provision

The apparent conflict between the level of resources dedicatedto technical analysis by practitioners and academic theoriesof market efficiency is a long-standing puzzle. We explore apreviously unexamined feature of technical analysis —namely its relation to liquidity provision. We demonstrate thatsupport and resistance levels coincide with peaks in depth onthe limit order book and moving average forecasts reveal informationabout the relative position of depth on the book. Furthermore,we show that these relationships stem from technical rules locatingdepth already in place on the limit order book.