I’m starting to sound like a broken record… It was another volatile week for the TSP with all funds ending in the red; except for the G fund. For the week, the C fund ended down 1.58%, S fund down 2.15%, I fund down 0.50% and F fund down 0.21%.

Are we nearing the end of this correction OR, are things about to get a whole lot worse? Only the Market knows the answer to that question! All we can do is apply our analysis tools and respond to how the market answers.

The deck is stacked against us right now. From a seasonal perspective, February is historically the second worst month of the year for stocks. We have the crisis in the Ukraine, the FED raising interest rates, and the highest inflation level since 1982. There are plenty of reasons to be pessimistic but, the market often bottoms at times of heightened fear.

In last week’s Newsletter, we looked at Plan A and Plan B for the C fund. This week, we’re going to draw a big line in the sand that will help us identify when the market answers the question. We’ll also look at the C fund from several different perspectives before moving on to the other TSP fund charts.

Our Line in the Sand

The Head & Shoulders Pattern is a technical analysis classic. It is easy to identify and provides us with a target for when the pattern plays out. The H&S pattern playing out in the C fund chart below is a little sloppy. Ideally, we want to see the left and right shoulders relatively symmetric and the head better formed. Having said that, there is nothing invalid about this H&S pattern.

4300 is the neckline. If the C fund closes below the neckline, we can expect it to drop significantly further. If the neckline of a bearish H&S pattern is broken, price tends to fall equal to the distance from the neckline to the head. In this case, the distance from the neckline to the head is 500 points. From the neckline to the target price would also be 500 points, giving us a price target of 3800.

Those are the basics. It’s important to remember that the pattern could play out for some time before either breaking the neckline or failing. Price could oscillate, between support at 4300 and resistance at 4600, for several weeks. The other thing to keep in mind is that patterns are not an exact science. We can all look at the chart and see the neckline at approximately 4300. We can also see several intraday lows below 4300 since the left shoulder began; particularly the late January daily low at 4220. Bottom line, the 4300 area is critical but don’t hold it to the penny… That’s the Line In The Sand.

If the H&S pattern does play out, what other tools do we have to help validate the target of 3800? The market often finds support or reverses at Fibonacci levels. In the case of the C fund charts below, we’re applying both Fibonacci retracements and extensions to help validate the 3800 target.

The 2 year weekly chart below shows retracement levels of the rally from March 2020 to January 2022. The market often retraces 38%, 50% or 62% of its prior bull run. A 38% retracement from the CoVid low to the January 2022 high would take price to 3815. This would be an area that we would expect price to find support. It’s not exactly 3800 but it’s close…

We can use a shorter term, daily chart of the C fund with Fibonacci extensions to further support the 3800 area. The length of a wave 3 is often equal to 1.618 times the length of wave 1. In the case of the C fund, wave 1 is the distance from the January top to the low. The 1.618 extension would bring price down to 3850. Again, not an exact science but does support the area of 3800 as a potential bottom.

We’ve identified a potential support level at around 3800. What other analysis can we point to that supports a topping pattern in general? The 5 year daily chart of the C fund below shows the importance of the 50DMA and 100DMA. Only 3 times in the past 5 years has support failed at the 100DMA. In 2018 the 100DMA became resistance and price continued significantly lower. In 2020, once price gapped down below the 100DMA, it fell below the 2018 low before finding a bottom. In the present correction, the 50DMA and 100DMA are acting as resistance. This resistance is making a break in the neckline much more likely.

Regardless of how the H&S pattern plays out, the most important take away comes from the 2 year weekly chart of the C fund below. We can see that, on a weekly basis, the C fund finds support at the 20 week EMA line. Once this line was violated in January, it began to act as resistance. Until the C fund makes a weekly close back above the 20 week EMA, there is no expectation for a sustained rally in the stock funds.

The TSP Funds

In the 1 year daily chart of the C fund we can see the set up forming. 4300 is clearly the neckline. We have resistance at the 50DMA and 100DMA. We have decreasing and low volume on days when price increases and big volume days when price decreases. Most importantly, the technical indicators are all pointed lower. The cards are certainly stacked against the C fund finding support at the neckline…

The S fund hit an interesting milestone at its January low. From the high in November to the low in January, the S fund retraced 38% of the move from the CoVid low. With the S fund coming down to the 38% retracement level following an A-B-C pattern from the November high, I was hopeful that a recovery would work. Unfortunately that possibility seems to have failed. The S fund reversed at the down trend line last Thursday and the decline continued this week. At this point, it looks like we will see lower lows on the S fund. The next support level would be at 1650 and the 50% retracement. This also aligns with the short term top in October 2020.

The one year chart of the I fund below is a great example of what we COULD see on the C fund going forward. The I fund has a very strong lower channel line at 75. This level was tested 6 times in the past year before it failed in late January. Since then, price recovered to resistance at the moving average lines before rolling over during the past two weeks. At this point, it is unlikely that the 75 level will provide support on the next test.

WE COULD SEE SOMETHING LIKE THIS ON THE C FUND. The C fund could break the neckline, recover back up to resistance, and then put in the major downturn to the 3800 area. This would be a brutal whipsaw if you were using a break in the neckline as your trigger to get out of the C fund. Watching this play out from the G fund, we are not subjected to this potential. We will be watching any recovery rally from the neckline for an opportunity to get back into the stock funds.

We showed a similar chart for the F fund last week. This week we added the Fibonacci retracement from the breakout in late 2018 to the top in July 2020. It is still the pattern with the highest probability for gains in the near term. The F fund closed lower for the week but put in a bullish reversal on Wednesday and moved higher for the remainder of the week. With support at both the long term trend line and the 38% retracement level, the F fund is looking very attractive at this point. If the neckline fails on the C fund, using an IFT into the F fund would be a great option with only 5 trading days left in the month.

Bottom Line

The charts are telling a pretty grim story. We have near term support areas to watch for all 3 stock funds. The 4300 level on the C fund, the January low at the 38% retracement level for the S fund, and the lower channel line at 75 for the I fund.

IF these support levels are violated, we are in for another significant move lower in the stock funds.

IF these support levels hold, we could be at the bottom of this correction and looking for an impulse move to new all time highs.

The market is teetering on the edge. If stocks break down and the F fund breaks up then we’ll make some money during the next market decline. At this point, watching all of this play out from the safety of the G fund is a great place to be.

Have a great week!