strategy - Is there any good research on support and resistance?

Could somebody advise me on where to find good literature on the justification or motivation for using support and resistance lines - and also lines of maximums and minimums. In finance, it is sometimes difficult to find the relevant literature because even if a book does not claim to be able to make you rich, the content of the book can still be bad.

Any good literature on support/resistance would be nice.

Answer

Contrary to popular belief, there does exist some truly high quality academic literature on this topic. The most sophisticated and well executed paper in this regard is Lo, Mamaysky, and Wang (2000). They write:

In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and we apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution—conditioned on specific technical indicators such as head-and-shoulders or double-bottoms—we find that over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value.

and

We find that certain technical patterns, when applied to many stocks over many time periods, do provide incremental information, especially for Nasdaq stocks. Although this does not necessarily imply that technical analysis can be used to generate “excess” trading profits, it does raise the possibility that technical analysis can add value to the investment process.

Moreover, our methods suggest that technical analysis can be improved by using automated algorithms such as ours and that traditional patterns such as head-and-shoulders and rectangles, although sometimes effective, need not be optimal. In particular, it may be possible to determine “optimal patterns” for detecting certain types of phenomena in financial time series, for example, an optimal shape for detecting stochastic volatility or changes in regime. Moreover, patterns that are optimal for detecting statistical anomalies need not be optimal for trading profits, and vice versa. Such considerations may lead to an entirely new branch of technical analysis, one based on selecting pattern-recognition algorithms to optimize specific objective functions.

A search for this paper also reveals other potentially valuable academic articles on technical analysis and chart patterns, such as this list.