Supply Zone

A Supply Zone is a horizontal price region where sellers previously absorbed buyers so aggressively that price reversed sharply downward. The zone's upper boundary is typically the highest wick of the rally that preceded the reversal; the lower boundary is the body close of the reversal candle. When price returns to this zone, the expectation is that leftover institutional sell orders will defend it, producing another rejection.

Supply zones are classified by the price action that formed them: Drop-Base-Drop (continuation in a downtrend) and Rally-Base-Drop (reversal from an uptrend) being the two canonical patterns. Fresh (untested) zones are considered stronger than zones that have already been revisited, because each touch depletes the resting orders. The zone's "base", the number of consolidation candles before the drop, inversely predicts strength: fewer base candles signal sharper institutional commitment.