The second quarter of 2018 ended on an ominous note.  What began as a huge Friday rally soon turned into a significant daily reversal.  While the close on Friday was above Thursday’s close, the reversal does not inspire confidence going forward…  For the week, the C fund was down 1.33%, the S fund was down 2.26%, and the I fund was down 1.22%.  

It’s been quite a volatile first half of 2018!  Our benchmark C fund began the year with a 5% move to the upside.  Since then, the market has been down to sideways.  For the year, the C fund is up less than 2%, the S fund is up about 5.5%, and the I fund is down about 3%.  From my perspective, there is only one big question going forward; was the January high the top of the rally that began in 2009?… It’s going to take a while for us to definitively know the answer to that question.  This week’s post will look at the possibilities and how we might hedge our TSP accounts to maximize what upside is left and minimize the downside, if we have in fact seen the top.  We’re going to focus on multiple time horizons of the benchmark C fund.

Long Term

The market has progressed in a classic Elliott Wave pattern since the low in 2009.  We have confirmed the first 4 legs.  The question is, is the 5th leg complete or is there a little more upside before the top.  The C fund has been consolidating since the late January high, meaning the price has not been above the January high nor below the February low.  Until we get a close above or below these levels, the question remains…  With that in mind, we hedge our bets by looking at support levels and shorter term patterns to attempt to predict price movement going forward.

The 2 year trend line is holding.  As long as the price stays above this line, the assumption is that prices (on a monthly basis) continue higher.  If this trend line is violated, we should expect to see prices fall over time to the 10 year trend line.  Unfortunately, the June monthly reversal is not a good sign and the technical indicators do not look good on a monthly basis.

Dialing it in a bit, the 5th leg of the 2009 rally began at the low in 2016.  This leg is also progressing in 5 legs.  Again, we have confirmed 4 or the 5 legs.  The question is, do we go higher from here to complete the 5 legs, or have we seen the top in January?  As long as the 2 year trend line holds, the assumption is that we will see a final leg higher.  Having said that, the chart does not look good.  A weekly close below the 2 year trend line would pretty much seal the deal…

Short Term

In the short term, Friday’s reversal was a very bad sign.  We do have support at the 50DMA.  The 200DMA is just a bit lower so we could see additional support there.  A big price move lower, ON BIG VOLUME, will be the kiss of death…  A Head & Shoulders top pattern could be forming on the daily chart.  We’ll talk about this more as it plays out over the next couple of weeks.  May is the left shoulder, the June high is the head, and we’ll see if the right shoulder forms in July.  The neckline is 2700 so, if the right shoulder forms and we get a gap down below 2700, the next support would be about 2615.  

It’s going to be an exciting summer (if you’re a chart geek!).  My goal is to squeeze out as much upside as we reasonably can but this rally is DEFINITELY on borrowed time.  IF you’re still in the stock funds, please stay alert.  Market risk is very high.

Have a great week and Happy 4th!

Jerry