Tom Bowley's Market Chatter for March 1, 2013

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PRICE/VOLUME COMBINATION:

One thing is certain. The market environment is now such that impulsive selling has become a bit more normal. We haven't seen too much selling since the mid-November low with the one exception being the fiscal cliff issues just before year end. That seems to have changed - at least temporarily.

Because of the long-term negative divergences and the recent breaks of 20 day EMA support, I'd pay little attention to the 20 day EMA as support during bouts of selling and concentrate much more on the 50 day SMA and key price support levels like 1465 on the S&P 500. To the upside, watch recent candlebody highs on the major indices. In the case of the Dow Jones, 14164 marks its all-time high close. While a break above that level will have the CNBC folks excited, we'd need to evaluate performance of various indices and sectors before growing overly bullish.

Currently, weakened short-term volume trends are not helping the bulls' case.

MACD DIVERGENCES:

Divergences remain one of the primary issues for the bulls, especially those ugly daily negative divergences. Usually, it just takes time for the slowing momentum problems to play out. This is likely to be no different. Patience will be required.

MOMENTUM OSCILLATORS:

The stochastics and RSI are as follows on our major indices:

Dow Jones: 79-59

S&P 500: 64-54

NASDAQ: 48-50

Russell 2000: 39-51

It's fairly obvious from the above oscillator readings that money is gravitating towards the safety of Dow Jones and S&P 500 stocks. That doesn't give me a great feeling about a sustainable rally occurring from this level. We need more work.

SENTIMENT:

The VIX was flat at last check as the effect of Monday's spike continues to play out. My guess is that we will not eclipse Monday's high anytime soon, but anything is possible.

MAX PAIN:

I'll take my next look at max pain after the second Friday in March.

HISTORY:

The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.

UPDATE: ALL OF OUR MAJOR INDICES ARE NOW BULLISH.

SECTORS:

The 10 year treasury yield has come under pressure again, with 1.85% gap support being tested. Traders are quite comfortable moving into treasuries which is not a particularly good sign for equities.

The dollar (UUP) is continuing its ascent. While odds suggest this strength in the dollar is bad news for equities, please keep in mind that the dollar and equities can rise simultaneously. If equity traders believe that sequestration will force lawmakers to become more fiscally responsible, it's quite possible that the S&P 500 and the price of the dollar could rise together, confusing many traders who have grown accustomed to the two moving inversely to one another over the past decade.

A rising dollar is not good for gold, however, in any scenario. I'm actually a bit surprised that gold (GLD) isn't weaker today with such strength in the greenback. Part of it could be that the GLD was so severely oversold recently, that it simply needs to consolidate those losses. In any event, keep a close eye on 148 price support on the GLD. Loss of that level could be bearish for gold for many, many months, perhaps even years.

Not too surprisingly, materials and energy are lagging today as strength in the dollar has put additional pressure on these two sectors. On the other side of the spectrum, healthcare is the top performing sector. It's actually a mixed bag as financials have joined healthcare in positive territory. To be honest, it's just a jumbled mess, which isn't too unusual during periods of consolidation in the market. If we see breakouts across our major indices, the composition of the various groups leading the advance becomes critically important. Until then, it just makes for good conversation.

ECONOMIC AND EARNINGS REPORTS:

January personal income fell 3.6%, more than the consensus estimate of a 2.4% decline. January personal spending rose 0.2%, matching expectations.

February Michigan sentiment rose nearly 2% to 77.6. Analysts were looking for a flat reading.

The February ISM index topped forecasts, rising to 54.2 from last month's 53.1 reading. A slight drop to 52.4 was expected.

January construction spending fell 2.1%, while consensus estimates called for a 0.5% rise.

DIAMOND STOCK UPDATE:

Of all the Diamond stocks, only TDW has fallen to a territory to be concerned, despite all the recent volatility. Price support from recent tails come into play in the mid-46 area. If volume picks up and the 46.00-46.50 area are lost, I'd consider taking a small loss and moving to the sideline. One troubling sign is that the oil services index ($OSX) is higher than it was after Monday's big selloff, but TDW is lower. It's underperforming its peer group, so a heavy volume breakdown should be respected.

INDIVIDUAL STOCK ANALYSIS:

I'd tend to be a bit cautious heading into the weekend given the continuing issues with divergences and money rotating more towards safety.

SUMMARY:

Positive money flow tends to help stocks historically as we enter new calendar months. Even with yesterday afternoon's selling and this morning's gap lower, I'm watching the action improve throughout this morning. Once we move past this historically bullish part of the month, however, the bulls may encounter more difficulty in trying to sustain the rally off November lows.

I hope you're able to enjoy your weekend and spend some quality time with family and friends!

Happy trading!

Tom Bowley Chief Market Strategist Invested Central