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At the beginning of the submodule, we covered the topic of support and resistance when using price action, first focusing on a very important part of price action analysis: the wick.
Very simply, the wick shows a reversal within the candle. If the reversal is particularly large in a candle, the momentum that created the reversal can be transferred to the next candle and the candles that follow.
In this case, the key takeaway is that the point at which the wick begins to form – the same price where the reversal begins on the lower time frame – is the relevant resistance price that traders can follow on their charts for future trading stops or analyze.
But – what if multiple wicks line up at the same price?
You may remember the last point from our last article, I would like to draw your attention to a red line on this USDJPY chart. I’ll repost it below to highlight what I’m talking about.
Chart created by James Stanley; USD/JPY hourly, late March-early April 2022
Earlier, we looked at a reversal triggered by an extended wick on this hourly chart. But look what happened to the red line after moving pricing.
The selling stops when the price hits the red line after topping out. The bears swung again, but when they touched the level for the second time, the selling stopped as well.
This is a sign of support. Below I take a closer look at this element, there is a blue box around each jump. I also added a green line, which we’ll get to later.
USD/JPY hourly chart
Chart created by James Stanley; USD/JPY hourly, late March-early April 2022
If a vertex shows two bends, this brings up a possible double bottom. Such patterns typically target a bullish reversal, provided that price reaches a support level that it failed to break, and that support eventually translates into buyers reversing the trend in search of higher prices.
Do you remember that green line? Well, that’s what you call the “neckline” in this formation, it’s just the high point between the two support bends. If a short-term breakout takes hold, a breakout of this bracket will open the door for an uptrend.
In the example below, we can see where this breakout arrives after the second support bend, after which the green line of the previous resistance will soon be re-used as support before starting an uptrend.
USD/JPY hourly chart
Chart created by James Stanley; USD/JPY hourly, late March-early April 2022
Wick Sequencing
Let’s look at the same example again, but this time we’ll use the four-hour chart. The benefit of the four-hour chart is that we can get more information from the same number of candles, but at the cost of less granularity.
But price is price, and whether that price acts as support or resistance on one-minute or weekly charts, it shows up as a curve on candlestick charts.
But – when we get a set of candles that are all showing wicks in a similar range – it highlights an important price level that is working and continues to drive price action in that market as it does. In the table below, notice the orange boxes, one to the left of the graph and one to the right.
The first orange box shows resistance, which later turns into support. The second orange box shows support from previous resistance. The point is that these prices don’t simply land on the chart, where there are references to previous days’ trading activity at these levels.
USD/JPY four-hour price chart
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