It was another down week for the TSP as this Bear Market is really beginning to settle in. For the week the C fund was down 2.88%, S fund down 2.33%, I fund down 0.55%, and F fund down 1.71%.

In this post, we’re going to simplify the charts a bit. By using daily closing price charts with Trend Line analysis, Volume, and Relative Strength (RSI), we can identify the trend and determine the best conditions to be in the stock funds or in the G fund.

The Simplest Answer is Usually the Best Answer

We’ve all heard the old adage that the simplest answer is usually the best answer… Technical Analysis lends itself to paralysis by analysis. When creating charts in StockCharts.com, there are 25 ways to view the price chart, 20 overlays, and 50 technical indicator options. These can be combined in countless ways. Add volume, trend lines, and pattern recognition to the mix, along with multiple time frames, and it can get overwhelming in a hurry.

There is a time and a place for all of the tools available in Technical Analysis. The better you get at understanding how to use these tools, the better you will be at selecting which tool(s) will give you the insight that your looking for. Having said that, often times, the simplest tools work the best.

In this post we’re going to use the 6 month daily charts. We will use closing price, rather than Candle Sticks, to filter out the intra-day noise. From here we’ll apply trend lines, volume, and RSI analysis to create a very simple picture of when to be in the stock funds and when to be out of them.

Trend Line Analysis

The line chart is created by connecting the daily closing price over time; 6 months for the charts below. Line charts don’t give us as much detailed information as Candle Stick charts but, they filter out the noise of intra-day price movement and reveal the true underlying trend.

When the market is in an up trend, we see higher highs and higher lows in price. From October 2021 to January 2022, the C fund was in an up trend. By connecting the higher lows, we create the support line. From 1 October to 1 January, each time price tested the support line it rallied to new highs.

In mid-January 2022 the support line was violated. This was a confirmed, short term trend change and the first indication of a possible long term change in the trend. Price bottomed in late January and did not recover to new highs before turning lower in early February. This was the confirmation of a longer term change in trend.

If we connect the price highs since the January top, we create the resistance line. Each time price has tested this resistance line, it has rolled over and made lower lows. Lower highs and lower lows is the definition of a down trend.

Trend line analysis is not an exact science. There can be overshoots past support and false breakouts above resistance. Having said that, trend lines clearly help us to identify the direction of the general trend.

Volume

Volume tells us the number of shares that trade in a given day. On days when price finished higher than the day before, the volume bar is black. On days when price finished lower than the day before, the volume bar is red. When price is in an up trend, we should see high volume up days and low volume down days. When price is in a down trend, we should see high volume down days and low volume up days.

In the C fund chart, we see generally low volume on up days from October to January, even as price is rallying higher. This is an indication that the rally is coming to an end as trading is drying up. In early January, overall volume increases and volume on down days increases significantly. Trading is picking back up and more investors are selling than buying.

Relative Strength Indicator (RSI)

The RSI is a momentum indicator that measures the rate of change of price movement. RSI shows the power behind a price move over time. Generally, RSI will be above the 50 line during an up trend and below the 50 line during a down trend. Often, when RSI crosses the 50 line to the upside, a new up trend is beginning. When RSI crosses the 50 line to the downside, a new down trend is beginning.

Again, the indicator is not perfect. There are false breakouts and overshoots. Having said that, if we look at the RSI of the C fund below, we can see that we want to be in the C fund when RSI is above 50 and out when RSI is below 50.

The same type of analysis can be applied to the S fund. We connect the higher lows from October to November to identify an up trend. Once the support line is violated, price continues down and fails to make new highs. By connecting the lower highs from mid-November to present, we create the down trend, resistance line.

Because StockCharts.com does not capture volume of the $DWCPF index (S fund), we use the Vanguard ETF VXF as the proxy. We can see low overall volume in October and November even as price continues to rally. This is an indication that the rally is fading. Volume picks up significantly in mid-November with much higher volume on down days than up days. This pattern has continued to present.

The RSI clearly shows that we do not want to be in the S fund when RSI is below the 50 line.

The I Fund was in a well defined, relatively horizontal channel from October 2021 to February 2022. This channel is established be connecting the highs and lows to give us the upper and lower limits. Our first indication of a problem was the failure of price to test the upper channel line in mid-February. By late February, the lower channel line failed and price collapsed.

Like the C and S funds, volume on the I fund was low in general in October/November. Volume was significantly lower on up days and significantly higher on down days. Price began to fall in mid-January and the 50 RSI line was violated, along with increased negative volume. It was clear by mid-January that the I fund was in trouble…

The F fund was in a horizontal channel, with support at 113, from October through 1 January. During this time, positive volume was relatively high compared with negative volume, and RSI was oscillating around the 50 line. Once the support line was violated in early January, negative volume increased and RSI lost support at 50.

Price continued lower until late February when positive volume increased and RSI began to tick up. On 28 February, price broke above resistance through the down trend line on big volume. This was the first indication that a tradable bottom was in place. Price rolled over to test the resistance line on low volume; a bullish sign. Unfortunately, this fledgling rally could not hold and price broke back down below the trend line to lower lows in early March. RSI did tick above the 50 line during the breakout but, the 50 line is clearly acting as resistance. This is a classic “Bull Trap” during a Bear Market.

Bottom Line

Technical analysis can be overwhelming but, it doesn’t have to be. The line chart, plotting daily closing price, takes away the noise of intra-day movement. Connecting significant highs and lows gives us our support and resistance trend lines. Volume tells us the amount of shares that traded on days when price was either up or down. Finally, the RSI tells us the power behind a price move.

By using these simple tools and keeping an eye on price, we don’t need to worry about how world events will effect the market on a daily or weekly basis. The price chart will tell us everything we need to know to make sound reallocation decisions.

It’s going to be an exciting week! The FED will meet this week and implement the first of many interest rate hikes to come in 2022. How much the FED raises rates, and their comments about rate hikes going forward, will almost certainly cause significant volatility this week. Don’t be surprised to see big price swings in either direction.

Have a great week!

Jerry