It was a tough week for the TSP stock funds.  Early strength gave way on Thursday and Friday.  For  the week the C fund closed down 0.28%, S and I funds were both down 0.39%, and F fund was up 0.34%.  All 3 stock funds are right on their respective 10 Day Moving Average (DMA) lines.  Any further weakness next week, especially a down move on big volume, would be a serious red flag…  

We’ll look at the weekly chart of the C fund then the daily chart of all 3 stock funds.  After that, we’ll do a deep dive into the RSI and MACD technical indicators.  

Long Term

We had a serious weekly reversal this week.  A weekly reversal is often seen at the top of a rally, though not always.  (We had a weekly reversal in late April and prices exploded higher the following week.)  Right now, this is a data point…  A lower close next week could identify the end of the rally that began in March.     

Short Term

All 3 of the daily charts look very similar.  First, each closed Friday right on their respective 10DMA lines.  We need to see prices above the 10DMA for this rally to remain intact.  Second, each reversed after hitting resistance at their recent high from early June, setting up a double top pattern (See Resistance #1 Line from last week’s post).  Finally, the MACD and RSI are rolling over which indicates that momentum has shifted.  We will discuss MACD and RSI next…   

Taking into consideration the big weekly reversal, the price position on the 10DMA line, and headwinds we usually see in the summer months, a big down day next week would push me toward the G fund.

Technical Indicators

Technical indicators are one of 3 parts usually present on a stock chart.  First there is price, represented in our charts as a Candlestick.  Second is Volume, usually below and behind the price.  Finally there are Technical Indicators, positioned above or below the price chart. 

Generally speaking, a technical indicator is a series of data points derived from applying a math formula to price data.  Formulas vary depending on the goal of the indicator. There are dozens of technical indicators available at StockCharts.com, each providing a different nugget of information.  We select technical indicators that have 3 functions; Alert, Confirm or Predict price movement.  (Click here to go down the rabbit hole of technical indicators at StockCharts.com)

Because there are so many indicators that provide such a wide array of information, most investors find a handful that work best for their trading environment and stick with them.  I have found that MACD and RSI are 2 of the most useful indicators when making TSP reallocation decisions.  

MACD (Moving Average Convergence/Divergence) is a momentum indicator.  On a daily chart, the MACD has 3 parts.  The MACD (Black Line) is created by subtracting the 26 day moving average from the 12 day moving average.  The signal (Red Line) is the 9 day moving average of the MACD line, used to identify turns.  The Histogram (Blue Daily Rectangles) gives us the difference between the MACD and the signal line.  The MACD is a visual representation of price momentum.  When the MACD line crosses down through the signal line, price momentum is decreasing (ie a good time to sell).  When the MACD line crosses up through the signal line, price momentum is increasing (ie a good time to buy).

RSI (Relative Strength Index) is also a momentum indicator that measures the speed and change of price movement.  RSI is plotted on a chart from 0 to 100.  When the line is over 70, the price is said to be “Over Bought”.  When the RSI line is below 30, the price is said to be “Over Sold”.  RSI can be a leading indicator, meaning that the line can remain above 70 as price moves higher or below 30 as price moves lower.  Once RSI reaches Over Bought or Over Sold levels, we watch closely as the next major move is likely in the opposite direction.     

Price/MACD/RSI

So what is the bottom line for us as TSP investors, utilizing price charts to make reallocation decisions?  When the  momentum indicators are over extended in one direction or the other, and then switch, price reverses also.  The chart below pulls it all together.

When the market collapsed in February, the RSI had already peaked.  When price gapped down through the 10DMA on big volume and MACD turned negative, that was the day to sell.  By late March, RSI had bottomed out and reversed.  When price gapped up through the 10DMA and MACD turned positive, that was the day to buy.  

  

Bottom Line: Technical Indicators are VERY useful in helping to identify market tops and bottoms.  This was a basic introduction to MACD and RSI.  If you have any interest, I would HIGHLY recommend looking through the Chart School at StockCharts.com.  It provides a wealth of information regarding all things in the Technical Analysis / Charting world.  

Please post questions to comments, FaceBook, Twitter, or email.  As always, stay ALERT.  

Have a great week!

Jerry