This is week #2 of Market Tops. Last week we looked at several technical indicators and Investors Business Daily’s methodology for identifying POTENTIAL market tops. This week we look at some charts that help us draw lines in the sand to get us out of the market, even as the final top is still not clearly identified. Fibonacci extensions give us a market top target, while trend lines and moving average lines help us take action as early as possible following a market top. Sometimes both weekly AND daily price charts are necessary to get the full picture for making reallocation decisions. We look at market tops and a wrap of the 6 month, daily TSP fund charts.

This week all TSP funds were in the Green! While all funds closed higher, it was the big price move on Friday that accounted for the gains. For the week the C fund was up 0.61%, S fund up 0.32%, I fund up 1.05%, and F fund up 0.26%.

Analysis of a Market Top

The first step in determining a market top is defining a target price. Fibonacci extensions are an excellent tool for setting a target. The most common extension is 161.8%. To find this number, take the price difference between the most recent major high and major low. Multiply that number by 1.618 and add that number to the most recent low number. In the chart below, we take the high in 2007 minus the low in 2009. Multiply that by 1.618, then add that to the 2009 low. That gets us to the 161.8%, upper red line, at 2146.39. You can see how long it took price to break thru that ceiling… That level then became support as the lower end of the Covid crash. Price pushed right thru the 2.618 level and is now approximately 8% below the 423.6% extension level. That’s our next target based on the 2007-2009 high/low.

Drilling down the timeframe, we take the high in February 2020 and the low in March 2020. Applying the Fibonacci extensions from here we get the 161.8% extension at 4150. Price hit resistance at this level in early April and has been essentially flat ever since.

Once price is in range of a target Fibonacci extension level, we need to look very closely for topping patterns. In the 3 year weekly chart below we see the run-up, top, and collapse tech bubble in 2000. We have a well established lower trend line from October 1999 to October 2000. We also see higher highs and higher lows until the September 2000 high. This high was lower than the March 2000 high; the first major red flag. The C fund then went into a series of consecutive down weeks, culminating in a breakdown thru the trend line and both moving average lines. The breakdown thru the 50WMA was the last best sell signal.

Given a 3 year weekly chart, with the run up, top, and breakdown, it’s relatively easy to see the pattern and sell triggers. Watching on a day to day basis is much trickier…

Below is a 1 year daily chart of the C fund, from September 1999 thru September 2000. It’s a chart of the Tech bubble top but, it’s much more difficult to spot the pattern, and act on it, using the chart below vs the chart above…

The TSP Fund Charts

On the face of it, the C fund breakout on Friday looks great! Thursday found support at the 10DMA and price broke out on Friday from that support. Looking a little deeper, we see the Thursday was a down day on big volume (a distribution day). Friday’s price advance came on lower volume than Thursday. Also, the RSI and MACD have flattened out. Friday’s big price move did very little to change the direction of the technical indicators. Friday was a constructive day but, not enough for me to jump back into the stock funds.

The S fund has recovered back to the center of its channel, between a high of 2250 and a low of 2050. On the positive side, the 10DMA has crossed up thru the 50DMA. This is a bullish event. We also got support at Thursday’s test of the 10DMA. On the negative side, momentum has been flattening even as price was increasing over most of last week. As long as price stays above the 50DMA, the S fund is still in good shape.

The I fund is riding its 5 month upper channel line. I would want to see this line become support (versus resistance) before moving back into the I fund. Alternatively, getting back into the I fund on its next test of the 50DMA would be a great swing trade.

The F fund chart still looks the best. Friday’s 0.41% price move after support at the 10DMA could be the beginning of a big move higher. The chart looks like a somewhat sloppy Head & Shoulders bottom pattern where 114.50 is the neckline. Again, the only downside of this breakout is lackluster volume…

Bottom Line:

IBD has changed its Market Trend Analysis from Market Under Pressure to Confirmed Up-trend. While it is possible that we are at the beginning of a new rally higher, I’m personally not yet convinced for three reasons. First, the RSI and MACD technical indicators have not moved higher consistent with Friday’s price advance. Second, the price advance came on volume that was lower than Thursday. Finally, Friday’s big up day came after Thursday’s distribution day.

Fortunately, we can wait and see how the market acts on Monday morning before making a final reallocation decision. If we see a strong positive price move on Monday morning, be on the lookout for an Alert…

Have a great week!

Jerry