I had a feeling this morning’s sell-off might reverse. It seems the early market-moving economic data, which showed a drop in The Chicago Purchasing Manager’s Index, wasn’t as dire as the initial reaction by traders made it seem. 

Still, the major indices all finished in the red. While briefly tip-toeing in positive territory only to lose momentum might seem disappointing, it’s important to note that the bulls defended an important support level at 1047 on the S&P 500. Ultimately, it appears stocks are stalling ahead of Third Quarter earnings.

Now, let’s move on to the day’s Top Gainers…

The intermediate trend has been broken. We are now in the stage of lower lows and lower highs. From the chart you can see visually how the DOW has traded for the past month. clearly the beginning of the month was all bull and now the tides are turning. We warned about this happening all month and now I’m getting those “you were right” emails all over again. If you learn anything today about trading learn this: PEOPLE NEVER CHANGE. They get greedy and fearful all the time.

I’ve been discussing how investors can use the "Most Price % Change" list published on Yahoo! Finance to find worthy stocks that will start making money for you in the near-term, and hopefully in the future as well.

Of course, not every stock that shows up on the "Most Price % Change" list is investment worthy. It’s too harsh to say the majority of stocks that show up on this list are "pump and dumps", but if you watch the list for a while, you’ll notice that one day’s top gainer is the next day’s top lower. In other words, many of the stocks that make the "Most Price % Change" are reacting to news that will only affect the price temporarily.

I lump all biotechs into this category. Of course, that means I miss a few biotechs. But I am not a doctor. I can’t speak to how important a particular drug might be. And besides, news from biotechs about the results of a drug trial is never a surprise. Investors are always holding the stock in anticipation of that news. I do not want to be buying while they are selling.

The key to using the "Most Price % Change" list is to be able to discern the relatively few stocks that are moving on fundamentally important news from the majority that are moving on temporarily important news. Trust me, this skill is not instinctual. It can be learned…

A couple of today’s Top Gainers made the list due to buyouts. Aspect Medical Systems (Nasdaq:ASPM) jumped 55% after Irish healthcare tech company Covidien’s $210 million buyout offer was accepted.

And GenTek (Nasdaq:GETI) was up 40% on a $411 million buyout from private investment firm American Securities.

The biggest percentage gainer for the day was Tri-Valley (AMEX:TIV). Tri-Valley is a oil and mineral exploration company from California. It has oil properties in California and Alaska. And its recent demonstration that new extraction technology could make "tens of millions" of barrels of oil recoverable in California appears to be what’s driving the stock higher.

Unfortunately, the company’s press release doesn’t say whether we’re talking about 20 million barrels of oil or 90 million. And the difference is an important one…

There are some strange goings-on on the Top Gainers List today. There are some impressive moves, like the +150% that Luna Innovations (Nasdaq:LUNA) achieved on 10X average daily volume.

But when we put them to the test of my Top Gainer criteria, I can’t see why Luna is moving higher. According to a press release on the corporate website, "…the company has been selected 13 U.S. small businesses to enter into negotiations for an award in the Photovoltaic (PV) Technology Pre-Incubator program of the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL)."

Read carefully. Luna has not been awarded anything. It’s simply been invited to negotiate for an award. That doesn’t sound like good reason for a 153% gain…

Readers are probably used to the fact that small caps outperform on both the upside and the downside. But how does an investor take advantage of that?

Of course, you could subscribe to my SmallCapInvestor PRO advisory service, where we’ve averaged 36% per recommendation this year. But that’s probably not the answer you seek (at least not yet)…

Another way to quickly find small cap names for potential investments is to follow the "new highs of the day." On Yahoo! Finance, they’re called the "Price % Gainers". This is the list of the stocks that make the biggest moves in a single day, and it’s nearly always dominated by small cap stocks.

Now, the small cap stocks you find on the Top Gainers list have just made a big jump in price. It should be understood that the majority of these stocks are moving on news and will give the gains they’ve just recorded. But, for the discerning eye, the Top Gainers list can be a goldmine for small cap stocks that are breaking out to new highs…

The big question for the end of the week is will Oil break support and send us lower. Yesterday’s failure of the markets to carry through after the FED announcement was amazing for the bears. It’s great to finally see some perma-bull get absolutely slammed! Now to Oil. From the chart below you can see that last week it broke below a minor trendline and successfully retraced the breakout before falling away. Now it’s sitting right at support, but will it break (BLUE AREA)? If it does, then the equity markets will continue the sell off.

Per the new intra-day support and resistance targets, I would expected after yesterday’s fall to rally early to around 1,068 as a natural resistance level. After that, we should be heading down to the next major support at 1,059.

Finally! The Fed decision sent the markets free-falling this afternoon after initially jumping to new highs. Only goes to show you that ANYTHING can happen in this market. Just look at the sell off following the FED decision today. Nothing but downward pressure. Obviously a great day for Members and I as we had a lot of short trades.

ENERGY SECTOR BREAKOUT OR FAKEOUT - Interesting day thus far. Started boring but now the indexes are approaching their highs once again. Here is chart of the XLE (energy sector ETF) which you can clearly see the line in the sand as resistance at $56. For things to get going for the bulls, this needs to be taken out soon.

THE EUR/USD HOLDS THE KEY - Morning all. Seems that overnight the futures got a very nice boost from the Dollar’s weakness. As I continue to say, the EUR/USD holds the key for the equity markets now. However, the upside potential is fairly limited for the EUR right now. In BLUE is an area of MAJOR long term resistance and I would expect the rally to end there or before.

Did the XLE successfully retrace it’s breakout today? Let’s hope not. As you can see the breakout from last week was a little worn out, and the sell off today was fairly normal and expected. What’s troubling for us bears is the retracement (BLUE). A strong rally from here would send the S&P much higher. On the whole it was a pretty hum-drum day for the equity markets. We stayed right below our target resistance at 1,065 with the S&P closing at 1,064.66. Tomorrow should provide a clearer picture of the rest of the month.

DAY TRADING RESISTANCE STILL HOLDING - Looks like morning sell off bounced right near our support target of 1,056 - imagine that. Technical analysis works again. And now we are sitting right below the resistance level at 1,065. Clearly we need to continue lower to see some more sellers come into the market. Anything higher on Oil right now might spark another rally attempt.