It was another tough week for the stock funds but, the relatively small weekly losses hide a significant structural breakdown. We’ll get to that in the charts. For the week the C fund finished down 2.08%, S fund down 1.81%, and I fund down 1.83%. The F fund is still in rally mode; up 0.80% for the week.
Using the Tools to Make Trading/Reallocation Decisions
Technical analysis is a skill set that enables you to make deliberate, unemotional reallocation decisions based on historical price action. The better you get at applying the tools, the more confidence you will have in your reallocation decisions. Below we lay out or base analysis of the S&P500 (our C fund) as of Thursday morning.
We start with the long term price chart. In this case, the most recent significant high was January 2022 so, we use a daily chart going back to late 2021. Overlaid on top of price is the 20 day exponential moving average (DMA) line. The technical indicators in our stack are Relative Strength (RSI), Commodity Channel Index (CCI), and the Moving Average Convergence/Divergence Oscillator (MACD).
With the October low in place, how high can we expect price to recover? To answer this question, Fibonacci analysis is a great tool. We would expect price to hit resistance, and roll over at one of the Fibonacci retracement levels between the January high and the October low. Recently, price has been above the 38% retracement level but has not yet hit the 50%. This tells us to have an open mind about further price advance. The most common retracement levels are 38% and 62% so, we could see price climb to 4304.
On a shorter time frame, the August high to the October low, price has crossed the 62% retracement level. The next target would be 4143 (the 78.6% retracement level).
Because price has not reversed off of any of the FIB levels, right now this tool is not helpful from these price levels.
The next step is pattern recognition. In this case, price has carved out a clear AB=CD pattern off of the October low. Price has clearly hit resistance at 4100 (D). We learned 2 pieces of information here. First, the pattern is holding. Second, if price exceeds D, it is likely to move higher.
Next is our Buy and Sell triggers. These triggers are pure technical analysis. They do not take macroeconomic circumstances or events into account.
Our base case buy trigger is when the following 4 conditions are met: 1. Price is above the 20DMA 2. RSI is above 50 3. CCI is above 0 MACD has crossed up. They don’t all have to happen on the same day but, all 4 must be in place for our base case buy trigger.
Our base case sell trigger is the opposite. 1. Price is below the 20MDA 2. RSI below 50 3. CCI below 0 4. MACD crosses down. Again, this does not all have to happen on the same day.
We frequently get the question, “What if I have a higher risk tolerance? How can I be more aggressive?”. The chart below shows 3 of the 4 conditions being met. If you want to be more aggressive early in the rally, don’t wait for RSI to get above 50. In the buy signal below, all conditions were met except RSI was not above 0. If you bought the C fund on 18 October, your risk of a rollover is higher but you are getting into the rally earlier.
On the sell signal, if you want to remain in the trade longer, wait for a clear break in the RSI to the downside. Keep in mind that we are in a Bear Market. The bias should be cutting losses very short.
Another very useful tool is trend line analysis. In this case, connect the significant lows since the October low. A close below this line would signify a weakening of the most recent trend.
Finally, as we have discussed for months, the 3900 price level has been important support and resistance since May of 2022. Price has been oscillating above and below that level for the past 6 months. A daily close below 3900 implies another leg down in price.
This is how we generally analyze the charts of the TSP funds to make reallocation decisions. There are certainly other tools in our kit but, this is our base case. IT IS NOT AN EXACT SCIENCE! The goal is to be on the right side of the market as early in a trend reversal as possible. There is always risk that the market will go the other way. What we are doing is putting the odds in our favor.
Once a decision is made using technical analysis tools, we then need to consider the decision with respect to the Noon Rule and 2 move per month rule. That adds another significant level of complexity and will be a topic for another newsletter…
The TSP Fund Charts
The C fund hit a perfect AB=CD corrective pattern off of the October lows, then rolled over this week. Having broken below the recent up trend line, the next leg of the Bear Market has begun…
The S fund retraced to a perfect 61.8% Fibonacci line, tested that line twice, and then rolled over. Price also broke down below the recent up trend line. The S fund should continue lower from here.
The I fund hit a perfect 50% Fibonacci retracement from the September 2021 high to the October 2022 low. The I fund has not yet tested its near term up trend line but, that test should happen in the next few days.
There has been a lot of talk about the F fund over the past week. Lots of people wondering if now is the time to buy. Here is the base technical analysis case for the F fund.
The F fund topped out in July 2021. Since then, it has declined in a perfect 5 wave pattern (Elliott Waves) to complete wave I down. IF the pattern continues, the correction to this declining wave should play out in an a-b-c corrective pattern to complete wave II. Once wave II is complete, wave III should take prices significantly lower. The economic implication of this pattern is for much higher interest rates going forward.
There are other possibilities but, this is the base case. It will be very interesting to see how this plays out!
Technical analysis is a skill set. Look at enough price charts and you start to see the patterns. You start to see retracements and use the Fibonacci retracement tool to validate what your eye sees. It definitely takes practice but, anyone can do it! Applying technical analysis will give you a lot of confidence in making reallocation decisions!
There are 2 weeks left in 2022. Do we get a Santa Clause Rally? From the lows as of this week, it wouldn’t be a surprise. If we get it, don’t expect much upside gain. It looks like the next leg down in this Bear Market has begun.
The big question now is, does price close below the October low? It has to retrace through the Fibonacci levels first… What if price finds support at one of the FIB levels on its way down to the Oct low? We’ll look at that possibility in next week’s Newsletter.
Have a great week!
The Grow My TSP Team