What would Resolve first?
Yes. Wirewood Lodge's ability will go on the stack. Once it resolves, Timberwatch Elf will be untapped and the active player will get priority. Yamabushi's Flame won't resolve until all players pass priority, so your opponent has a chance to activate Timberwatch Elf's ability targeting itself. 

Of course, there will need to be at least one other elf in play in order for the ability to actually save it from the 3 damage Yamabushi's Flame will deal.