The major averages fell on Tuesday, led lower by financials, while a flurry of downgrades hurt stocks. Volume totals reported on the NYSE and Nasdaq exchange were higher than the prior session totals, which technically made it a distribution day.  Additionally, breadth was poor as decliners led advancers by about a 3-to-1 ratio on the NYSE and on the Nasdaq exchange. There were 23 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, down from the 26 issues that appeared on the prior session. On both exchanges new 52-week highs still significantly outnumbered 52-week lows, and new lows were in the single digits again.

CIT Group (CIT -18.92%) was among the weak performers in the financial sector after it delayed reporting its latest results. Meanwhile, MBIA Inc (MBIA -12.64%), the country's largest bond insurer, plunged after an analyst from JPMorgan Chase & Co (JPM -3.40%) lowered the stock to a rating of "underweight." These disappointments coupled with negative comments from famous bank analyst Dick Bove sent a slew of financials lower on Tuesday. Bove, a famous banking analyst, said he expects shares of lenders to retreat after their recent gains. Remember, financial stocks were one of the strongest industry groups that led the market higher since the March lows. The fact that they sold off today was not an unexpected surprise after such an impressive recovery. However, additional distribution days for the major averages could start to spell trouble for the aging rally.

News on the earnings front remains strong but is now largely behind us as the vast majority of stocks have already released their Q2 results. According to Bloomberg.com, so far, earnings have topped analysts’ estimates by at least +10% on average for the 450 companies in the S&P 500 that released results.  Even thought earnings were above estimates they were still down some -30% last quarter. That was a record eighth straight quarterly decline of earnings. The sales fell on average -16%. Remember that the market is a forward looking mechanism which means that the recent rally illustrates investors' collective outlook for a strong recovery (i.e. future earnings).  At this point, it is wise to continue to watch your stocks and remain cautious until this correction has run its course and a new batch of leaders begin triggering fresh technical buy signals. 

PICTURED: The S&P 500 Index slumped below the 1,000 mark, but the benchmark remains in healthy shape above prior chart highs and its 50-day moving average (DMA) line.

Charts courtesy www.stockcharts.com

PICTURED: The Bank Index ($BKX -4.35%) sank back near prior chart highs.  After its steady streak of gains a pullback is no surprise.  The recent bullish 50-day & 200-day moving average line crossover indicates near-term strength which is an encouraging sign that bodes well.

Pegasystems Inc  (PEGA -$1.28 or -4.09% to $30.04) gapped down for a loss today on lighter volume following a negative reversal after hitting a new high on the prior session. It is still extended from its latest base and above its "max buy" level. Note that studies have shown that approximately 40% of successful breakouts pull back and re-test their pivot points before continuing higher.  Prior chart highs which were resistance in the mid-$27 area are now a very important technical support level to watch, and they come into play above its 50-day moving average line (now $26.39). It posted a considerable 8/05/09 gain with nearly 5 times average volume following strong Q2 earnings and raised guidance. That was a confirming follow-through gain after the high-ranked software firm had first triggered a technical buy signal when rising from the "double bottom" base on the day it was featured in the 7/29/09 mid-day report (read here). 

Disciplined investors avoid chasing stocks extended more than +5% above their pivot point, and once any new buys are made, those stocks are quickly sold if they fall more than -7% from the buy price. Investors who typically enter stop-loss order -7% below their buy price might raise their stop losses and not be willing to give the stock as much room to the downside now.  However, after having seen it trade as much as +19% above its pivot point, also keep in mind a rule of the investment system that says a stock which rallies more than +20% in the first 2-3 weeks after it was bought should be held for a minimum of 8 weeks and given a chance to produce more substantial gains. It may be worthwhile to occasionally review past trades to see if you have a tendency to let losing positions get out of control, chase stocks and buy them too late, or jump the gun and buy them before they have triggered a proper breakout from a sound base pattern. Being ultra-careful in regard to entries and exits provides no guarantee that investors will reap huge profits, however, undisciplined buying and selling decisions will obviously hurt your chances of having great success.

During its last base, the second low was a "lower low" which provided the necessary "shakeout" which is an important characteristic of a proper double bottom pattern.  The heavy volume behind its breakout easily met the minimum +50% above average volume guideline of the investment system for a proper breakout.  The high-ranked Computer Software - Financial firm has shown solid sales revenues increases and +25% earnings increases and 3 of last 4 quarterly comparisons versus the year ago period. The previously noted downturn in annual earnings (the A criteria) from 2003 to 2006 has been followed by a solid turn around and big earnings increases in '07 and '08, and Street expectations for '09 are calling for well above +25% growth.

Color Codes Explained :
Y - Better candidates highlighted by our staff of experts.
G - Previously featured in past reports as yellow but may no longer be buyable under the guidelines.