Investors spent the day digesting a batch of mixed economic data and earnings reports. On the data front, the U.S. economy continued to expand at a modest pace in the third-quarter as GDP rose at an annual rate of 2% after a 1.3% advance in the second-quarter. In a separate report, the University of Michigan consumer sentiment index for October was lower than the preliminary reading, but managed to reach its highest level since September 2007.

Apple Inc (AAPL -0.91%) edged lower after a disappointing holiday sales outlook. Overall, nearly all sectors were lower. Financials were the worst performing group as Citigroup Inc (C -2.17%) and Bank of America Corp (BAC -1.30%) declined. Meanwhile, the defensive telecommunication stocks held onto gains and Verizon Communications Inc (VZ +1.08%) rose. Amazon.com Inc (AMZN +6.87%) also rallied after its operating loss was not as bad as expected.

In fixed-income, Treasuries gained ground with the 10-year note up 21/32 to yield 1.75%.

During market corrections the M criteria argues against new buying efforts and urges investors to take a defensive stance to protect precious capital. That stance can change back to a bullish stance where buying is encouraged when at least one of the three major averages produces a solid follow-through day (FTD).  A FTD confirming a new rally requires substantial gains on higher (ideally above average) volume, coupled with healthy leadership and a respectable number of stocks hitting new 52-week highs. Historic studies have shown that a FTD occurring between Days 4-7 of a new rally effort has often signaled the beginning of the most substantial market rallies.

Investors should always limit losses if ever any stock falls more than -7% from their purchase price. Following strict sell rules is precisely how this fact-based investment system prompts investors to reduce exposure and protect cash during market downturns. Keep a watchlist of strong acting stocks with all-key criteria in anticipation of the next confirmed uptrend.  See the noteworthy candidates included on the Featured Stocks Page.

Watch for an announcement via email concerning the Q3 2012 WEBCAST. The webcast will also be available via an updated link highlighted at the top of the Premium Member Homepage. 

PICTURED: The Nasdaq Composite Index finished -6.5% off its 52-week high. It halted its slide at its 200-day moving average (DMA) line. Subsequent deterioration would not bode well for the broader market outlook. Further weakness would be a signal for investors to reduce market exposure if they are not already entirely in cash. In this commentary we will continue to watch closely for an eventual rally and confirming gains within the ideal window for a proper FTD, meanwhile caution and patience are required.