Support, resistance and bases — where technical stops live

After this lesson you can find support and resistance on a chart, and you'll complete the stop-placement promise School II left open.

Levels with memory

Watch any chart long enough and you'll see price respect certain levels repeatedly: falling to €47, bouncing; falling to €47 again weeks later, bouncing again. That level is support — a price where buying has repeatedly shown up. Its mirror is resistance: a price where selling has repeatedly shown up and rallies have stalled.

These levels have a mechanism, and it's mostly memory. Everyone who bought near €47 last time and watched it bounce is inclined to buy there again. Everyone who wished they'd bought at €47 and missed it has an order ready this time. And above, at resistance: everyone who bought the earlier high at €55 and sat through a decline is waiting to "get out even", and their selling is what caps the rally. Price levels collect unfinished business, and that business shows up as orders the next time price arrives. (School VII will show you the same anchoring behaviour from the inside.)

Two practical notes. Levels are zones rather than exact prices: €47-ish, thick with orders, not €47.00. And a broken level tends to swap roles. Resistance that finally breaks often serves as support on the next pullback, because the people who sold there now wish they hadn't, and they buy the shares back around the same price.

Bases

A base is support and resistance working together: a sideways range, often lasting weeks or months, usually after an advance. It's either Stage 1 or a resting pause inside Stage 2 (course 2). Inside a base, holders who have run out of patience are selling out, and buyers who can wait months are absorbing their shares. William O'Neil built an entire teaching method on studying the bases of history's biggest winners before their major advances, and School IV's model-book course continues that tradition. For now, one skill: learn to see the base. A floor where buying repeats, a ceiling where selling repeats, and price compressing between the two.

The promise from School II, kept

School II taught the money stop: the exit that makes being wrong cost exactly 1R. It also promised that the stop would eventually get smarter, and this is where that happens.

A technical stop goes where the trade's reason has failed. If you bought because the base at €47–48 was holding and the stock broke out, then the trade's premise dies if price falls back through the whole base — below €47, with a little room for the zone's thickness, say €46.60. That's where the stop belongs, because that's where you're wrong, whatever the euro amount.

Then School II's arithmetic takes over, in the other order:

• Entry €50.00, technical stop €46.60 → €3.40 per share of risk.
• R = €100 → €100 ÷ €3.40 ≈ 29 shares.

You size the position to the stop, so that being wrong about the chart costs exactly one R. The level comes off the chart, and the share count is whatever the division returns. The beginner's version runs the other way round: buy a round number of shares first, then put the stop wherever the distance feels about right.

Check yourself

1. Where does resistance's selling come from, mechanically? (Largely from holders who bought near the old high and want out even, plus profit-takers from below. The unfinished business at that level turns into orders.)
2. A stock breaks out of a base at €30 and pulls back toward €30 two weeks later. Why might buyers appear right there? (Role reversal. The people who sold the breakout regret it, and the ones who missed it get a second chance, so the old ceiling ends up collecting new buying.)
3. Entry €25.00, base floor gives a technical stop of €23.75, R = €150. Size it. (€1.25 per share → 120 shares, position €3,000.)

The idea this lesson installs

Put the stop where the idea is wrong, then size so that being wrong costs 1R.

Next: Course 4 — "Volume: reading conviction."