Why do support (and Resistance) work? In differing views or explanations, they are:
1) Past major support act as key psychological price zone markers for traders to place their buy orders or get into the market upon fearing of missing the boat due to missing previous support bounce. This is a self perpetuating psychological belief that makes up alot of market moves we see.
2) Central bank currency pegs at key support levels to maintain their domestic currency price, so as to further the nation’s financial/domestic interests.
3) Market depth of buy orders is huge at or below zone of support.
4) Psychological level for sellers to cover (and hence buying orders increase due to covering).
5) Price become more attractive to buy than to sell. Demand greater than supply.
6) All big players and SM use support and resistance to trade. This is significant enough in the sense of their volume and position size being capable of making a “presumed” support become an actual support. Similar to central bank currency pegging concept.
And when they don’t:
1) Market depth of buy orders is considerably weaker than previous support points. This provides opportunity for SM to push thru support and get those who had buy orders to hit their stoplosses, further pushing the price down.
2) People who missed the breakout would like to now short at a better price, when price returns back to the original support level which then turns into resistance.
3) Prices bouncing of previous support are tapering, not going higher highs, but lower highs. A form of divergence or weakness in the support bounce. Psychologically, traders see such bounce as being weaker and less emphasis is given to such support levels, resulting in shallower market depth of buy orders.
And the list is not exhaustive as my mind is pretty saturated now.
The key point is that the market is a psychological entity, rather than a rational body which dictates that the price reflects an efficient market. Greed, fear, conservatism all exist in the market, and they are reflected in price action.