I see a lot of people looking at support and resistance and think that because we can see a spike on the chart, that is automatically the resistance to be looking at.
Everything on the chart has a level of importance, and the best way to find out what is a more significant level is by looking at engulfs.
Put simply, an engulf occurs when a candle reaches higher than a previous high, or vice versa with a low. This can happen because somebody, or an institution, has a large order to fill and therefore needs to take out some stops - also known as a "stop run".
Otherwise, it'll happen organically because price is on an uptrend or downtrend.
Here's a quick example of some engulfs:
See if you can find any more on your own charts, or in this example.
Now, if we put it in practice, let's look at a chart which I saw somebody mark on Twitter as below:
Let's zoom in to make it easier to see:
His argument was that this resistance could potentially turn to support, but as you can see, price engulfed it south, made a small reaction upwards from the consolidated area that the resistance line had previously held down, and now doesn't paint a very clear picture.
Can you see where he went wrong?
Here, I've marked the engulf of what really was a retrace in price, and shown the more significant resistance line.
As you can see, it turned into a very temporary support and bounced price perfectly for about 3%, before price dropped, and now this line has been respected twice as resistance again. It's also important to note that this resistance is on the daily chart, adding more weight to its importance.
Let's see how it plays out. I saw it as a great example of how engulfs work and thought I'd share it.
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