Stocks closed slightly lower Friday on worse-than-expected economic news. In seven of the past eight sessions, the key indices have closed lower. And, for the first time since early July, the Dow Jones Industrial Average (DJI) suffered its second consecutive weekly loss.

The problem on Friday stemmed from the Labor Department’s pre-opening report of a decline in September non-farm payrolls and a rise in the unemployment rate to 9.8%.

Although stocks managed to take back most of the initial losses, the major indices closed slightly lower. The Dow was off 0.23%, the S&P 500 (SPX) was down 0.45%, and the Nasdaq (NASD) fell 0.46%. 

But there was good news to offset some of the poor economic data: Invesco (IVZ) rose 5.5% following a Wall Street Journal report that they were the front-runner to buy Morgan Stanley’s Van Kampen funds. ConocoPhillips (COP) rose 2.9% following analysts’ favorable opinion of the stock, despite the company’s announcement that Q3 earnings will be hurt by lower natural gas prices and weak refining profits. And Wynn Resorts (WYNN) gained 3.1% when Moody’s said that its rating could be changed from “negative” to “stable” if a proposed offering it manages closes.

At the close, the Dow was off 22 points to 9,488, the S&P 500 fell 5 points to 1,025, and the Nasdaq was off 9 points to 9,488.  

The NYSE traded 1.4 billion shares with decliners outpacing advancers by more than 2-to-1. The Nasdaq had volume of just over 757million shares and decliners were ahead by 5-to-3.

For the week, the Dow fell 1.8%, the S&P 500 was also off 1.8%, and the Nasdaq lost 2%.

On Friday, November crude oil fell 87 cents to $69.95 a barrel, and the Energy Select Sector SPDR (XLE) was down 27 cents to $51.97. Technically the next support for the XLE is at its bullish support line at $51.50. 

December gold rose $3.60 to $1,004.30 an ounce, and the PHLX Gold/Silver Index (XAU) fell 63 cents to $157.17. 

What the Markets Are Saying

Even though Friday ended on a minus, there was enough late buying to take back most of the early losses. The low of the day at S&P 1,019.95 was made within the first five minutes of the opening, resulting in a slight penetration of the 50-day moving average at 1,020.90, but almost exactly on the current bull channel’s support line at 1,020. 

>

This may seem like “splitting hairs,” but it is just this sort of activity that creates support/resistance lines and many of the other tools that market technicians use to help determine whether markets are overbought or oversold.

Another indicator that I like is the Relative Strength Index (RSI). This is an overbought/oversold oscillator, and it is used to identify buying opportunities in market dips or selling opportunities in market rallies. 

It is expressed in a number from 0 to 100 with generally accepted levels of very overbought between 70 and 80 and very oversold between 20 and 30. But these extremes usually occur at the very tops and bottoms of major market trends and deep corrections. For example, the day following the bear market low on March 6, the RSI was at 27.56. 

Within the current bull channel, the most recent S&P low was at the last point of the support line. It occurred on Sept. 7 at 48.04. The low before that was on Aug. 17 at 51.45; that, too, was a support point in the channel.

The S&P 500’s RSI on Friday’s close was 44.28. In other words, the RSI is telling us that on Friday the market was more oversold than each of the last two support points.

Conclusion: The S&P 500 is now 5% from its September high, a mild correction. The RSI, the 50-day moving average and the support line of the current bull channel are telling us that last week may have marked another low in a bull channel uptrend and that stocks could again be bought. But the penetration of last week’s lows on a close would lead me to conclude that we may be headed to the next support zone at 980 to 1,010 for a full 10% correction. 

Keep an eye on the RSI since it tells you when the market is overbought or oversold.

Today’s Trading Landscape

Earnings to be reported: Mosaic Co. (MOS), Robbins & Myers (RBN) and RPM International (RPM).

Economic reports due: ISM non-manufacturing composite index (the consensus expects 50), and Conference Board Employment Trends Index.  

The old ways of investing don’t work anymore. But trading options founded on scientific principle can and does work in volatile times like these. Learn how to leverage the power of technical analysis to identify the short window when a trade is set to go straight up or down. Get your FREE copy here!