The major averages ended October on a very weak tick as the 7-month rally in equities came to an abrupt end. Volume was reported higher on the NYSE and Nasdaq exchange, indicating large institutional investors were aggressively selling stocks while the indices lost ground. Decliners trumped advancers by a 6-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq exchange. There were 3 high-ranked companies from the CANSLIM.net Leaders List making a new 52-week high and appearing on the CANSLIM.net BreakOuts Page, higher than the 1 issue that appeared on the prior session. In terms of new leadership, the week's action was a sign that there is none showing up.  New 52-week highs still outnumbered new 52-week lows on the NYSE, however new lows outnumbered new highs on Nasdaq exchange for a third consecutive day.

The sell off began on Wednesday October 21, 2009 when all the major averages had a "negative reversal" after hitting a fresh 2009 high. The market spent the next couple trading sessions tracing out negative reversals as the distribution day count began to rise. By Monday, the 7-month rally was under serious pressure as the major averages and a bunch of leading stocks began to fail. On Tuesday, stocks ended mixed but the Small cap Russell 2000 index sliced below support (50 DMA line & 7-month upward trendline). On Wednesday, October 28, 2009 the market clearly slid into a correction when the S&P 500, Nasdaq 100, Nasdaq Composite and NYSE Composite indexes collectively closed below support. This marked the end of the 34-week rally which began on the March 12, 2009 follow-through day and helped send the major averages to one of their strongest 7-month rallies in history!

Stocks bounced back on Thursday but volume, an important indicator of institutional sponsorship, was lighter than the prior session which suggested the bulls were getting tired. Thursday's rally marked Day 1 of a new rally attempt. However, the bears showed up on Friday and smacked stocks sending all of the major averages below Thursday's lows which negated the rally attempt and reset the Day count. The sell-off was so intense that it sent the S&P 500, Nasdaq Composite, Nasdaq 100, NYSE Composite and small cap Russell 2000 Index collectively below their respective 50 DMA lines and 7-month upward trendlines. In addition, all these popular averages turned negative for the month which snapped a 7-month winning streak. 

Right now the market is in a correction, which means adopting a strong defensive stance is paramount. Avoid new buys, since history shows us 3 out of 4 growth stocks follow the major averages, and tighten your stops to protect your capital. Remember to always keep your losses small and never argue with the tape. Looking forward, a new rally will be confirmed only when the market manages to produce a sound follow-through day. Until then, patience is king.

PICTURED: The Nasdaq Composite snapped a 7-month winning streak by ending lower in October.

Charts courtesy www.stockcharts.com

PICTURED 1: The Bank Index ($BKX -4.95%) ended -14.3% of its October high after undercutting its September - October chart lows.

Charts courtesy www.stockcharts.com

PICTURED 2: The Broker/Dealer Index ($XBD -3.29%) has also undercut its 50 DMA line for the first time in a few months, raising concerns.  In recent reports we have illustrated repeatedly how the financial group is faltering, which longtime members should know bodes poorly for the overall market outlook.

AsiaInfo Holdings, Inc. (ASIA -$1.23 or -5.28% to $22.06) fell for another considerable loss with above average volume today, consolidating following a 10/29/09 gap up for a big gain after reporting solid earnings for the period ended Sept 30, 2009 that beat expectations as it also raised guidance. It found prompt support near its 50-day moving average (DMA) line, a textbook chart support level, after a 7 session losing streak with losses on high volume triggered technical sell signals and briefly negated its latest breakout. Its color code was changed to yellow based on its impressive fundamentals and technical strength. However, market conditions (M criteria) are arguing against new buying efforts, and an overriding concern for disciplined investors until a new follow-through-day occurs.

Disciplined entries and exits are critical to investors' success with the investment system. ASIA was featured in the August 2009 CANSLIM.net News (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.