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New York Fed senior economist Carol Osler concludes that "support" and "resistance" levels, technical trading signals intended to indicate where exchange rate trends are likely to stop, are effective.
Osler explains that although support and resistance levels are widely used for short-term exchange rate forecasting, their ability to predict intraday trend interruptions has not been rigorously tested. Accordingly, she tests levels provided to customers of six firms active in the foreign exchange market during the 1996-98 period.
Osler finds that:
Support and resistance levels are quite successful in predicting intraday trend interruptions.
The predictive power of the support and resistance levels appears to last at least five business days after the levels are first communicated to the firms customers.
Although all six firms can identify turning points in exchange rate trends, some firms perform markedly better than others. As a group, the firms predict turning points in dollar-yen and dollar-pound exchange rates more accurately than turning points in the dollar-mark exchange rate.