Weekly Update: 19 July 2020

It was another very productive, yet volatile week for the TSP stock funds.  The week began with a wild Monday.  The market gapped up at the open only to give back all those gains, then some, by the end of the day.   The remainder of the week was solid and finished close to the top of the weekly trading range.  Importantly, even with some big price swings, the S&P500 (C fund) never closed below its 10DMA (Day Moving Average).  For the week the C fund was up 1.25%, S fund up 2.17%, I fund up 1.89%, and F fund up 0.33%

 I received 2 great questions this week.  The first, “Do the charts support higher prices going forward?”, will be the focus of this post.  The second, “Can you give us a basic Charting tutorial?”, we will discuss at the end of the post but, we’ll definitely hit some charting basics to answer the first question.

Do The Charts Support The Market Moving Higher From Here?

The answer is, It Depends… It depends on the time horizon of the charts you’re looking at.  Charting is about seeing patterns within patterns.  You start by knowing where you are in the Very Long Term pattern, then drill down to shorter time frame patterns to make reallocation decisions. 

Below is a 120 year chart of the Dow Jones Industrial Average (DOW).  We’re using the DOW because the S&P500 did not exist back in 1900.  The chart shows the current Very Long Term Elliott Wave count.  As we’ve discussed in past posts, Elliott Waves describes the 5 steps up / 3 steps down price progression.  When the market is in an up-trend, price moves higher in 5 steps or waves, where waves 1,3, and 5 move prices higher and waves 2 and 4 correct the previous move.  In a down trend, waves 1,3,and 5 move prices lower with waves 2 and 4 correcting the previous downward moves.  Elliott Wave Theory has a relatively small set of rules and correlations.  One important correlation is that wave 1 tends to have the same amplitude as wave 5.  We can see in the chart below that wave 5 has just about hit the amplitude of wave 1.  This tells us that, in a VERY LONG TERM perspective, we are likely at/nearing a MAJOR top.  

The above chart shows us a 120 year pattern.  Obviously we cannot use this chart to make reallocation decisions but, it does help to manage long term expectations.  Once this MAJOR top is confirmed, we are likely to experience DECADES of down trending prices.  This is NOT an exact science and there are no guarantees but, from a very long term perspective, market risk is very high.

The chart below shows us a close up of the Very Long Term leg 5 (2009 to present).  It remains to be seen whether or not a major topping pattern will emerge…  The late 2019 to early 2020 move down COULD be the first leg in a long term down trend.  Again, we’re not making reallocation decisions from this chart.  The point is that Market Risk, on a long term basis, is very high.

Present Day

The next 3 charts are 8 month daily of the 3 TSP stock funds.  These ARE the charts we use to make reallocation decisions.  All 3 charts are very similar.  All 3 are at/approaching their near term prior highs and within striking distance of their All-Time Highs.  We should expect some resistance at both the near term highs and all-time highs.  We need to watch closely to see how this plays out over the next few months.  As long as the price stays above the 10DMA, I will remain fully invested in the stock funds.  A close below the 10DMA will be a BIG red flag…

Bottom Line:  The Very Long Term back-drop is ugly and market risk is very high.  In the short term, the market is moving higher but bumping up against some significant resistance.  Watch the 10 Day Moving Average (DMA) very closely.  While every close below the 10DMA does not mean the market is crashing, EVERY market crash begins with a close below the 10DMA…

The Second Question

We covered a good bit of Elliott Wave Theory in this post.  Elliott Wave is one of the major building blocks of charting.  For those interested, I would highly recommend ElliottWave.com for a deep dive into the theory.  This weekend’s Weekly Update Show will be a tutorial on utilizing BigCharts.com to track the charts of the TSP stock funds.  This is a very simple charting website run by MarketWatch.  You don’t need a subscription and you can save settings without logging in.  It’s really all you need to track the 3 TSP stock funds and the F fund.  You can watch the Weekly Update Show at 6:30PM every Sunday night on FaceBook Live.  Tune it!

Stay Alert!  Have a great week!

Jerry