This column was originally published on RealMoney on Dec. 21 at 1:41 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
A notable formation Wednesday on the Nasdaq points to the bulls staying in charge on that index into year-end, and is a powerful reminder to stick to the charts, not the noise.
Noise, noise and more noise. Everyone has an opinion about where the market is going and why.
There is too much complacency, they tell you. The markets are too undervalued, they say. The sheer number of opinions out there could confuse even the most knowledgeable trader.
Cut through the noise by focusing on near-term charts. You might just see an ascending triangle, as I did yesterday on the Nazz's 60-minute chart.
The chart shows the clear long-term cup-and-handle formation that took eight long months to form, including the breakout above that handle high at 2378 from early November. That was a very powerful breakout indeed.
Notice what has occurred since the Nasdaq broke out. It tested that breakout -- normal behavior -- and since then, it has made equal highs at the 2470 area but higher lows. That equates to a very bullish ascending triangle. Because the lows are ascending, the triangle will get tighter and tighter when you draw in the trend lines. Ultimately, the Nazz will make a clean break out of that triangle.
But whichever way it breaks is the way you must play. This brings us back to the patient focus on the near-term charts, which is very difficult for most to maintain objectively without projecting onto the chart what they
to see. The move is coming. Wait to see it.
There's another notable formation worth a look on this 60-minute chart from Wednesday's Nazz. The day's candle is red, meaning it was a down day, but it's also hollow. A hollow red candle indicates the index gapped down at the open but was able to close above that open. So after the initial selling at the open, the on-balance volume for the rest of the day was positive. There were more buyers than sellers after that open, so once the index had sold off, the buyers jumped right in while the bears had used up all their fuel.
Notice also how this hollow candle formed right at the very bottom of the ascending triangle. In fact, there was a small breach below the triangle, which drew in more bears -- only to have the buyers jump in on top of them yet again. The buyers came in right where they had to in order to protect the bullish ascending triangle.
The bottom of that ascending triangle is now at 2415. A close below that level would be the first real red flag that deeper selling is going to occur. Sometimes a slight breach on a close can be a fake, but you have to respect it if it occurs and get bullish again only if it can recapture that level.
The bulls clearly had a big scare Wednesday. They will be the first to tell you that, especially since all we're hearing now is that the market is simply too complacent and that we can expect things to fall apart sooner rather than later. That may still occur, but at this point there is absolutely no evidence to back that up.
Again, if we lose Nazz 2415 and stay below it for a day or so, there will be no question that the sellers are in control. But even with the recent hard selling in the Nazz, all that's happened is that the top of triangle got hit and defended successfully by the bears. Conversely, as we hit the bottom of this ascending triangle, the bulls came in and did what they had to do.
The very nature of an ascending triangle puts the burden of proof on the bears. The bulls have the edge for now until proven otherwise.
Jack Steiman is president of TheInformedTrader.com, for which he also conducts live seminars, and Steiman New Research Group, LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Steiman appreciates your feedback;
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