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RFS Advance Access originally published online on March 26, 2004
Review of Financial Studies 2004 17(4):1043-1071; doi:10.1093/rfs/hhg057
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The Review of Financial Studies Vol. 17, No. 4 © 2004 The Society for Financial Studies; all rights reserved.

Technical Analysis and Liquidity Provision

Kenneth A. Kavajecz
University of Wisconsin–Madison

Elizabeth R. Odders-White
University of Wisconsin–Madison

Address correspondence to Kenneth A. Kavajecz, University of Wisconsin–Madison, 975 University Ave., Madison, WI 53706, or e-mail: kkavajecz{at}bus.wisc.edu.

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 explore a previously unexamined feature of technical analysis — namely its relation to liquidity provision. We demonstrate that support and resistance levels coincide with peaks in depth on the limit order book and moving average forecasts reveal information about the relative position of depth on the book. Furthermore, we show that these relationships stem from technical rules locating depth already in place on the limit order book.


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