The major averages ended lower on Friday, and down for the week, as the fourth quarter officially began. Volume was reported above average but under the prior session's totals which helped the major averages avoid another distribution day. Decliners led advancers by a 2-to-1 ratio on the NYSE and by nearly a 2-to-1 ratio on the Nasdaq exchange. There were only 4 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 8 issues that appeared on the prior session. New 52-week highs still outnumbered new 52-week lows on both exchanges.

On Monday, stocks rallied nicely after several multi billion dollar deals were announced. On Tuesday, the major averages negatively reversed (opened higher and closed lower) and suffered a distribution day after the S&P/Case-Shiller home-price index was released. The index, which measures home prices in 20 major metropolitan areas, rose +1.2% in July from the prior month. This was the largest monthly increase in nearly four years but stocks could not rally on the news- a negative divergence. Stocks ended lower as the third quarter ended on Wednesday. The Chicago Purchasing Managers Index was below estimates which sent lower. The Commerce Department revised its reading for the second-quarter gross domestic product. The government said GDP, the broadest measure of the economy, fell to a pace of just +0.7% in the spring. The new reading was better than the annualized -1.1% decline that economists were expecting. Even with the declines the third quarter was the strongest quarterly gain since 1998 for the major averages!

On Thursday, the bears showed up and sent the market lower after the Institute for Supply Management (ISM) said its manufacturing index slid to 52.6 in September which was lower than the reading of 54 projected by economists. This echoed yesterday's weaker than expected Chicago PMI report. The benchmark S&P 500 Index surged nearly +15% in the third quarter which was the strongest quarterly gain in over a decade. The S&P 500 Index rallied a stunning +34% in the past two quarters which is the largest back-to-back quarterly gain since a +42% surge in the first half of 1975. The blue chip Dow Industrial Average vaulted +15% last quarter and advanced +29% since the end of Q1, which is the largest two-quarter rally since 1986!

On Friday, the labor department said US employers slashed 263,000 jobs in September which was fell short of the Street's forecast for a decline of -175,000. The unemployment rate was 9.8% which matched the Street's estimate and was the worst level since June 1983 (when it was -10.1%). Payrolls have declined for the past 21 consecutive months and a total of  7.2 million jobs were shed during that time. Since the start of the recession there are 15.1 million people unemployed which is more than double the number when the recession began. Many people are concerned that unemployment woes will continue which might adversely affect the economic recovery. The International Monetary Fund (IMF) said this week that they believe higher unemployment coupled with the waning effects of the global stimulus package will hinder economic growth for 2010. The IMF believes that the US economy will grow by +1.5% in 2010, after contracting -2.7% in 2009.

From our perspective the current rally is in its 30th week, looking tired, and clearly under pressure since the September 23, 2009 negative reversal. Since then, there have been a flurry of distribution days and a series of leading stocks have been hit. Looking forward, the next area of support is the 7-month upward trendline and 50-day moving average (DMA) line for each of the major averages. If those technical levels are breached, downward momentum could more likely build and be expected to bring even lower prices. That said, raising cash and avoiding a considerable setback is easy, and it is definitely the thing to do if the market conditions continue to erode. Take a look carefully at each of your holdings on a case by case basis, and simply remove the weakest performers first. Never let any losses grow larger than 7-8% without taking action and selling.

PICTURED: The S&P 500 Index's 7-month upward trendline and 10-week moving average line (which tightly tracks the 50-day moving average line) coincide closely as important support levels all chart readers will be watching in the near-term. Deterioration in the market's technical trend would be undeniable if they are decisively violated.

Charts courtesy www.stockcharts.com

PICTURED: The Retail Index ($RLX -0.81%) has pulled back to its 50-day moving average (DMA) line after 8 losses in 9 sessions.

ArcSight, Inc. (ARST +$0.05 or +0.22% to $22.44) positively reversed after early losses led to a brief intra-day dip under its previously cited "max buy" level.  It has stubbornly held its ground near all-time highs after a consideable 5-fold rally from its November '08 low. It also has encountered very little distributional pressure since its latest breakout, and since its last appearance in this FSU section on 9/17/09 under the headline, "Healthy Post-Breakout Action".

Prior chart highs and its 50-day moving average (DMA) line closely coincide now as a very important support level to watch on pullbacks. Deterioration back into its prior base and under the 50 DMA line would raise concerns and trigger technical sell signals. Remember, disciplined investors avoid chasing stocks more than +5% above their pivot point, and always limit losses by selling whenever any stock falls 7-8% from their buy price. ARST was first featured in yellow at $19.91 in the 9/01/09 mid-day report with an annotated daily graph (read here) and it was also featured with more detailed analysis in the September 2009 CANSLIM.net News with an annotated weekly graph (read here). 

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.