The major averages were lower on Friday amid disappointment in the morning's economic reports. Personal income rose 0.1% in August, below expectations for a 0.2% increase. A separate report showed consumer spending increased 0.5%, in line with consensus projections. Another report revealed an unexpected decline in Chicago business activity in September. The market pared its retreat after results of Spain's bank stress test were essentially in line with expectations.

Materials-related firms were among the weaker performers as companies like Peabody Energy Corp (BTU -1.50%) and Freeport McMoRan Copper & Gold Inc (FCX -1.32%) fell. Consumer stocks also traded lower on the session. Walgreen Co (WAG -0.44%) was down after reporting a year-over-year decline in quarterly profits. Nike Inc (NKE -1.14%) was weaker after it warned of slowing future sales in China. Shares of Research in Motion Ltd (RIMM +5.09%) were up after posting a narrower-than-expected quarterly loss. Facebook Inc (FB +6.59%) rose after it unveiled a new gift giving feature for users.  The Hartford Financial Services Group Inc (HIG +0.73%) edged higher after it agreed to sell its individual life unit to Prudential Financial Inc (PRU -0.57%) .

The M criteria is still favorable as the major indices have maintained their previously confirmed rally with a healthy level of leadership (stocks hitting new 52-week highs).

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PICTURED: The weekly chart of the benchmark S&P 500 Index illustrates the 3 prior market "corrections" during the ongoing recovery from the March 2009 lows. The tech-heavy index is up +14.56% year-to-date.

The Broker/Dealer Index ($XBD -0.57%) and Bank Index ($BKX -0.36%) were a negative influence on the major averages, and the Retail Index ($RLX -0.26%) also edged lower. The Networking Index ($NWX -1.54%) and the Semiconductor Index ($SOX -0.83%) led the tech sector lower while the Internet Index ($IIX -0.44%) finished the session with a smaller loss and the Biotechnology Index ($BTK +0.31%) posted a small gain. The Healthcare Index ($HMO +0.06%) ended essentially flat. Commodity-linked grous had a slightly negative bias as the Oil Services Index ($OSX -0.92%), Integrated Oil Index ($XOI -0.69%), and the Gold & Silver Index ($XAU -0.61%) ended modestly lower.    

Charts courtesy www.stockcharts.com

PICTURED: The Bank Index ($BKX -0.36%) is consolidating near its May highs, well above its 50-day and 200-day moving average (DMA) lines. Continued bullish action in financial stocks bodes well for the broader market outlook as, historically, the major averages have been less prone to damaging downdrafts while financial stocks are in healthy technical shape.

Watson Pharmaceuticals (WPI +$1.45 or +1.73% to $85.16) hit a new 52-week high with today's gain backed by +71% above average volume lifting it above the "max buy" level. Its color code was changed to green after getting extended from its prior base. Disciplined investors always avoid chasing extended stocks. Prior highs in the $81 area and its 50-day moving average (DMA) line define important support to watch on pullbacks.

It was last shown in this FSU section on 8/28/12 with an annotated graph under the headline, "Holding Ground Following Recent News Driven Gap Up".  It was then holding its ground after its 8/24/12 gap up and solid gain above its pivot point backed by +143% above average volume triggered a technical buy signal.  The considerable gain with above average volume followed news that its generic Lidoderm(R) received FDA approval, an encouraging development concerning the N criteria.

It reported earnings +41% on +25% sales revenues for the Jun '12 quarter. However, the sequential comparisons show recent deceleration in sales and earning growth rate, which has been noted as a small concern. The 5/09/12 mid-day report had previously noted - "Its improved fundamentals make it a worthy candidate for investors' watchlists. Sales revenues showed impressive acceleration while the 3 latest quarterly comparisons through Mar '12 showed earnings increases above the +25% guideline satisfying the C criteria. It also has maintained a strong annual earnings (A criteria) history."  The number of top-rated funds owning its shares rose from 1,011 in Mar '12 to 1,051 in Jun '12, a reassuring sign concerning the I criteria.

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.