On Friday, January 22, US stocks ended their 46 week rally and entered a correction when all the major averages plunged below their respective 50-day moving average (DMA) lines. Since the March 2009 low, none of the major averages fell more than -10% from their post recovery highs which reiterates how strong this market actually is. Even other developed markets overseas have performed rather well over the past 10 months. However, the Hang Seng Index, Hong Kong's stock market, fell -10% from its recent high which could drag the rest of the world lower.

Looking at the market, Monday marked Day 1 of a new rally attempt which means that as long as Monday's lows are not breached, the earliest a possible follow-through day could emerge will be this Thursday. However, if Monday's lows are taken out, then the day count will be reset and the chances for a steeper correction increase markedly. It is also important to see how the major averages react to their respective 50 DMA lines. Until they all close above that important level the technical damage remaining on the charts is a concern. So far, the market's reaction has been tepid at best to the latest round of economic and earnings data. Remember that the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks.  Disciplined investors will now wait for a new follow-through day to be produced before resuming any buying efforts. Until then, patience is key.

PICTURED: The Dow Jones Industrial Average's gain marked Day 1 of a new rally attempt.

Charts courtesy www.stockcharts.com

PICTURED: The Internet Index's ($IIX +0.06%) violations of an upward trendline and its 50 DMA line recently hurt the near-term outlook for Internet-related shares.

Pegasystems Inc. (PEGA -0.25 or -0.75% to $32.93) suffered a 4th consecutive loss today with light volume, closing near prior chart lows and just above its 50-day moving average (DMA) line in the $32-33 area which define important chart support. Additional deterioration would raise concerns and hurt it chances for the near term. Prior highs in the $35-36 area have been a stubborn resistance level since featured in the January 2010 issue of CANSLIM.net News (read here).  Since that appearance it did not trigger a proper technical buy signal, so disciplined investors did not risk any capital if they simply waited for the critical confirming gains that would have dictated taking action.

This high-ranked Computer Software - Financial firm develops, markets, licenses, and supports software to automate various business processes primarily the United States, the United Kingdom, and Europe. It has attracted an increasing number of institutional investors, as the number of top-rated funds owning its shares rose from 43 in Sep '08 to 79 in Dec '09, which is a solid reassurance concerning the investment system's I criteria. PEGA has shown good sales revenues increases and its earnings increases were well above the +25% guideline in the 4 last 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, '08 and '09.

Caution and patience are suggested until the stock manages to trigger a solid technical buy signal with gains above its pivot point. Until then, investors may be wise to resist the urge to get in "early." Confirming gains backed by more than the minimum +50% above average volume guideline would provide a reassuring proof of institutional buying demand which could sustain a more meaningful upward advance.  Keep in mind that much of a stock's success depends on the broader market's (the M criteria) ability to sustain a meaningful rally, otherwise 3 out of 4 stocks are likely to struggle in the event that the market encounters more distributional pressure in the new year.  Since the market is currently in a corrections, odds are not in favor of new buys working out until a new rally is confirmed with a follow-through-day of gains from at least one of the 3 major market averages.

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.