Support and resistance

Support is a price where enough resting buying interest exists to stop a fall. Resistance is the same on the way up. Neither is a property of the number — it is a property of the orders sitting at that number, and orders can be withdrawn. That is the whole reason levels break.

Where a level actually comes from

1. 1A prior swing high or low. Someone sold there and it worked, so they will try again; someone bought there and it did not, so they want out at breakeven.
2. 2A prior consolidation. The more volume that changed hands in a price band, the more people have a position with an opinion about that band. This is the strongest kind of level and the least obvious on a plain line chart.
3. 3A round number. Rs 500, Rs 1,000. There is no economics in it — but a large share of resting limit orders sit on round numbers, and that is enough to make it real.
4. 4An issue price. Nepal-specific and genuinely useful: the IPO price, and the price of a rights issue, are levels a great many holders remember precisely.
5. 5The 52-week high or low. Published everywhere, watched by people who watch nothing else.
6. 6A widely-used moving average. The 200-day is not support in any mechanical sense, but enough people act on it that it behaves like one.

Draw it as a zone, not a line

A hydropower share is rejected three times over three months, at highs of Rs 486, Rs 491 and Rs 484. The resistance is not Rs 486. It is the band Rs 484 to Rs 491, roughly Rs 7 wide.

• A short entry at 486 with a stop at 488 is placed inside the zone. It will be stopped out by the level doing exactly what you expected it to do.
• The stop belongs above 491, plus a little for the stock's own noise — see ATR.
• A first draft drawn from closing prices rather than wicks is usually cleaner. Wicks record where price briefly went; closes record where it was willing to stay.

Role reversal, and why it happens

Broken resistance commonly becomes support. Suppose that Rs 484–491 zone finally breaks and the stock reaches Rs 520, then pulls back to Rs 490 and holds.

• The people who sold at 486 and watched it run to 520 now want back in, and 490 is their second chance.
• The people who bought the breakout want to add on a pullback, and this is the obvious place.
• The people who were trapped long from months earlier finally got out at breakeven on the break, and are no longer supplying stock.
• All three groups act at the same price. That is what makes the level hold — not the chart remembering anything.

Judging strength

Nepal: circuit limits create levels that are not levels

NEPSE applies a daily percentage band to how far a share may move. A stock that closes at its upper limit several sessions running has not found resistance — it has found the rule. There was no seller at that price willing to stop it; there was a regulation. Drawing a resistance line across those closes describes the circuit, not the market.

The same applies at the bottom. Repeated closes at the lower limit usually mean the selling has not finished — there simply was no price low enough to be allowed. Treat circuit closes as missing data, not as evidence.

Next: the levels in sequence — trend analysis→