Friday seems to have been an important day for the markets. What happened on Friday that was significant?

Actually, it started on Thursday. At the very end of the day as the market was slowing down, the Nasdaq, which was at very low compressed levels of minus 20 on the MACD line – about as low as the line can go – retested and put in a positive divergence. When the Nasdaq or any sector gets to very compressed levels on their MACD, puts in a lower low on price and puts in a positive divergence – this one was a significant positive divergence, a much higher MACD line (less selling intensity) – that tells you the market is about to blast off.

That's why we took our inverse short off on Friday, did nice with that play, and went long. In addition, the daily charts had stochastics down in the single digits. When the dailies are compressed and oversold, and then you add the MACD on the 60-minute charts putting in a positive divergence off the bottom of their MACD line, that is a formula for buying, and you saw the results on Friday. An explosion in the market! We got long at the right time, and we got out of our short at the right time.

During the past week you were telling subscribers about certain key levels you were watching on the Nasdaq. What are those?

2,432 on the Nasdaq was the triple bottom breakdown from the other day that boded poorly to the near-term action. We first lost 2,442, which was the 50-day, and then 2,432. So for the market to get back in good graces, it needed to reclaim 2,432 and 2,442. Now, actually, the 50-day is down to 2,439.60. So what happened Friday was that we got through those levels, pulled back in the middle of the day, and it looked pretty grim and pretty hopeless. But I was pretty adamant about the fact that I thought the market would continue higher, and in the last 20 minutes big money, big volume, big everything came in. The market not only cleared 2,432, it cleared 2,439. It exploded and closed at 2,454.

What does that mean going forward?

That's a good short-term signal. That doesn't mean the market is not done testing down. There will still be tests down. But the market is in the process of putting in a 10-year-plus cup and handle – it's in the handle process right now. The weekly charts look fabulous, and we think the market is carving out its ultimate bottom here. It's not a smooth road, and handles have a tendency to get people shaken out, because they get nervous and moves up and moves down are very radical and very quick. My opinion – and I could be wrong , of course – is that the market is carving out an ultimate bottom in June when no one expects it to.

So you've been adding to your longs?

Yes, we took Thursday's weakness and we're adding to longs.

Once you get a market buy signal, how do you apply that to specific stocks to pick?

You start looking at stocks that have pulled back in their MACDs – from the very top down the 0 line, meaning there's a lot of selling intensity. At the same time, the stochastics get oversold and then the rising 50 DMA catches up to the stock price. As the declining price comes down to the rising 50-day, when they catch each other and the MACD starts to turn up (less selling intensity), that's when you know that a bottom is in the stock and that's when you want to start playing some of those stocks.

What's an attractive play right now?

Foster Wheeler (NASDAQ: FWLT, Stock Forum) is one. We put out the chart on Friday to our subscribers. You see the stock made a high, pulled back $10, and at the bottom MACD started to turn up just as price hit the 50 DMA. You can see the great volume trends, and when you start looking at that combination of appropriate pullbacks and all the oscillators, plus the strong volume trend, catching support on price at the same time the 50-day is coming up underneath, that's the time you want to start getting aggressive on a stock like that.

We've seen a lot of patience from you in the last month of so. That must be difficult, as you're in the business of giving people stocks to buy.

That's interesting you say that, because today I got an email from a client who said he was disappointed because I just wasn't putting out enough stocks. I wrote him back and reminded him that from October when the market started its massive slide down to today the market's down almost 15%, while we're up about 7%. I said, "Isn't that the kind of outperformance you want?" Why be aggressive in an un-aggressive market and play more than you should? I often use the expression "less is more." I'm a big believer in capital preservation. Some people say that there's a bull market everywhere somewhere, which may or may not be true at all times. But I look at a market environment. When a market environment is unfavorable I'm big into cash. When a market environment is clearly on a sell signal, no problem shorting. When the market's on a buy signal, no problem going long. When the market is vacillating in a handle, and is whipsawing, and the MACDs are unclear, the best thing to do is stay cash rather than get in trouble by forcing the market. You only play when the market truly sends a signal that's palpable to you, and Thursday and Friday that positive divergence with those 60's at the bottom was a palpable thing to me that said now we can go long.

How do you know when to exit?

You have to know your critical resistance levels. We know that 2,465 on the Nadsaq if it stopped there and pulled back a little bit wouldn't be a bad thing because that could form the right shoulder of an inverse bullish head and shoulders. Maybe at that point if you have a dollar or two here and there maybe you take it off. Or maybe you don’t because if the bigger picture looks good you can just hang in there for a 15-20 point pullback and let the market fly and use weakness to get more. Basically you're using critical points of support and resistance along with the oscillators to tell you if things are healthy or not when they're pulling back, and vice versa.

Any parting shots?

I would say the most difficult thing for people to play the market appropriately is to leave emotion out of the game. Really to play what you see and not what you hear. I know it's an old cliché. There's a lot of noise out there, a lot of noise about where the market's going. At the moments of extreme pessimism and extreme distress and duress, that's when you should be buying. When you feel so bad that you just can't imagine buying, like on Thursday with the markets collapsing at the end of the day and the Dow down over 200 and down 400 three days before that, when you feel that the market's going into oblivion – that's when you should be buying if the market's flashing a buy signal. Try to be unemotional, try to be objective, see what you see and play it and more importantly know what you're seeing. If you're not a good technician, learn. Take the time, spend a little money and learn how to play the game. Play on paper money until you really learn. But if you know what you're doing, play what you see and not what you're feeling. Your heart may be telling you we're going to collapse, but sometimes you just have to trust what you see with your eye.

Jack Steiman is a former columnist for TheStreet.com who is renowned for calling major shifts in the market. President of New York-based Visionary Research Group, Jack consults to individuals and companies on stock market analysis and education. He honed his skills as a trading educator in front of live seminar audiences in his role as chief financial strategist for InvestEd Central, and also previously hosted two daily programs, "Market Close Live with Jack Steiman" and "InvestEd Central with Jack Steiman," on Business Talk National Radio.

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