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Arguably one of the more compelling areas of price action is the ability to identify important key levels or price areas. Of course, there are many ways to find potential support and resistance levels, but none of these prices are very valuable unless they actually show up as support or resistance levels.
To identify support and resistance, candlestick wicks can be very strong, which also illustrates multi-time frame analysis.
If you were tracking price on an hourly chart and the price suddenly reversed from an uptrend and wiped out all movement, how would this show up on a daily chart?
Possibly this is represented as a wick sitting on the day bar, showing a reversal that has taken place. On the daily USD/JPY chart below, I spotted such an extended wick and noticed that the price continued to fall over the following three days, despite the very strong trend that led to this move.
USD/JPY daily chart
Chart created by James Stanley; USD/JPY daily chart, late December 2021 to April 2022
In the hourly chart below, taking a closer look at the same iteration, we can see that there is also an extended upper wick, albeit much smaller than the one shown on the daily chart.
The three-day sell-off started with a fairly sharp trend reversal, even evident on the hourly chart.
What’s going on here: There may be a catalyst to start a quick reversal, and that’s just pricing in this new “bearish” factor. When we look at a price action trend, the trend is not moving linearly, it is usually a “two steps forward, one step back” sequence, which is evident in the example below, where the reversal starts as “two steps down”. One step higher.
USD/JPY hourly chart
Chart created by James Stanley; USD/JPY hourly, late March-early April 2022
You may notice the red line at the bottom of the image above. Well, this is very important for identifying support and resistance when using price action, which we will cover in our next article on the subject.
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