NEW YORK (CBS.MW) -- Nasdaq bulls shouldn't worry too much about a red light that flashed last week. They should be happy that the longer-term charts are starting to look much better.

Steve Nison, president of Candlecharts.com, says the appropriate Japanese proverb for the week is:"First go cautiously but finally boldly."

Red light provided by 'evening star'


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Taking a page from a centuries-old Japanese charting technique, Nison pointed to last week's"evening star" in the Nasdaq Composite ($COMPQ: news, msgs, alerts) as a sign of caution. (See interactive chart. Go to 'price display' and select 'candlestick')

An"evening star" is a three-candle pattern that Nison, the person who brought candlestick charting to the Western world (), likens to a traffic light. It starts with a strong up day -- the green light. Last Tuesday, the Nasdaq closed (2,168.24) was well above its open (2,116.24), indicating bulls had full control of the day's action.

The yellow light is the"star," which ideally begins with an open (Wednesday's was 2,205.25) that gaps above the previous day's close. There's a deep intraday sell off (low of 2,175.13), then a strong bounce that brings the close (2,220.60) near the open. Although the strong rally at the end of the day may look like a positive for the bulls, the sharp sell-off during the session implies they have become vulnerable.

The red light flashed last Thursday, when bears took advantage of this sign of weakness to force the Nasdaq down 74.40 to 2,146.20. Friday's rally was impressive, but it wasn't enough to cancel out"evening star." A move above, preferably on a closing basis, the star's highest point (Wednesday's high of 2,232.66) is needed to negate its effects.

That the"star" appeared where it did makes it shine a little bit brighter.

The crossroads

In the previous column, I pointed out a couple of technical factors that converged to make 2,250 a resistance level. When a warning sign pops up on cue, the likelihood of it working increases.

But it's also necessary to put reversal signals into a longer-term perspective. Although the"evening star" does suggest a cautionary approach in the short term, Nison feels that overall, the Nasdaq"has hit a major bottom."

He is very encouraged by the Nasdaq's ability to create and sustain rising"windows," where a day's intraday low fails to overlap with the previous day's intraday high. Rising"windows" tend to provide support until they are shut on a closing basis.



Since hitting a 30-month low on April 4, there have been five rising gaps that have yet to be closed. Even better, none were overlapped even on an intraday basis.

Although the size of a gap has no bearing on its strength, the biggie created by the Fed-induced rally on April 18 has provided enough confidence for the bulls, and enough fear for the bears, to keep from being violated at all. The top of the gap April 18's low of 1,995.91, but the closest bears have come since was April 25's low of 2,000.83.

Deserting the trend

I also pointed out in the previous column that bulls had more work to do as bears continued to draw strength from a weekly trendline. Looks like they did it.



To rehash, draw a line connecting the highs of weeks ended Sept. 1 (4,259.87), Feb. 2 (2,872.47) and April 20 (2,202.86). If the trend's slope includes at least three points, Wall Street will follow with blinders on. Once it is broken, however, Wall Street will change its allegiance very quickly. Loyalty is for losers.

If you extend the line into the future, you see that last week's low (2,088.61) sits right on it. Bear's tried to reclaim what was their's for the past seven months, but bulls refused. Instead, they've started their own trend.

Making a new friend



Line up the low of the week ended April 6 (1,619.58) and the last week's low (2,088.61). The recent rally has remained true to this trend, with the low's of each week's in between providing another point on the line (it may not be perfect, but close enough for horseshoes and technical analysis).

It would be nice to see bulls create a little more distance between them and the trendline, however.

The bulls' green light

What bulls have to do now is get the Nasdaq to close above 2,250, which is resistance at approximately the height of the"evening star" and other converging signals. It won't be easy, but Nison says that would provide the green light they are waiting for.

Except for a"minor" resistance points at around 2,310 and 2,550, Nison doesn't see any"major" resistances until above 2,900. The last time that area was approached was in late January, when a second"evening star" appeared on Jan. 30 (reinforcing the one on Jan. 24) to override the bullish effects of a broken downtrend


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