Charles Dow was the Grandfather of Technical Analysis. Dow was a journalist in the late 1800s. He co-founded the Dow Jones Company, including the Wall Street Journal, and created the Dow Jones Transportation Index and the Dow Jones Industrial Average. His work on averages led to the formation of Dow Theory. We do a deep dive into Dow Theory in this week’s Weekly Update Show and a summary in this post.

The market was in consolidation mode this week. While volatility continues, all of the TSP funds gave us reason to be both optimistic and cautious… For the week, the C fund was down 0.43%, S fund up 0.33%, I fund up 0.59%, and F fund up 0.03%. We will get into the details in the Daily Charts below.

Dow Theory

Dow Theory utilizes the two indexes created by Charles Dow; the Dow Jones Industrial Average and the Dow Jones Transportation Average. Dow theory says that the market is in an upward trend if one of its averages advances above a previous important high and is accompanied or followed by a similar advance in the other average. What Dow observed is that when the price of companies that manufacture industrial products goes up, AND the price of companies that transport those products to consumers goes up, then the market is in an up-trend. The reverse is also true. When the industrial average is trending higher and the transports is trending down, that divergence is cause for concern of a change in the trend. This trend change is not confirmed until both averages are again moving in the same direction. The chart below shows the Industrials ($INDU) and the Transports ($TRAN) on a weekly basis.

For most of the past 5 years, the Industrial and Transports moved in relative lock step. The outlier was in July 2019 when the Industrials put in a new high while the Transports put in a lower high. As the Industrials moved higher until early 2020, the Transports were flat. This divergence identified a potential upcoming trend change. That trend change was confirmed in February 2020. Today, both averages are again in lock step. We are watching closely for the next period of divergence for a potential change in the current long term rally.

For more on Dow Theory, check out the Weekly Update Show that will post on Sunday night at 6:30!

The Daily Charts

The C fund closed down a bit for the week but, it was actually technically productive. On Wednesday, price found support at its 50DMA and then reversed to close at the top of the day’s trading range. Thursday pushed price above the 10DMA. Friday’s negative reversal day was not encouraging but, the C fund did close out the week above its 10DMA. Support at the 50DMA is critical at this point.

The S fund is struggling and is currently the worst performer of the 3 TSP stock funds. The S fund was able to reclaim its 10DMA this week but hit resistance at its 50DMA on Friday. We need price to get above the 50DMA and then the 10DMA to cross above the 50DMA to confirm a new up trend.

The I fund is in very good shape, clearly back above its 10DMA. The I fund has been riding its 50DMA higher for the past 6 months, with the 10DMA being of little value for TSP reallocation purposes. As long as price stays above its 50DMA, the I fund’s up trend continues.

The F fund is also trying to maintain support above its 50DMA. If the 50DMA crosses the 10DMA to the upside, a new rally will be confirmed in the F fund.

Bottom Line

The market is consolidating the volatility persists. This is why they say, “Sell in May and Go Away!”. If you don’t have the stomach for summer volatility, reallocating to the G fund while we are very close to all time highs is not a bad option. If you are staying in the game, watch the 50DMA on the C fund closely. A big daily close below the 50DMA would almost certainly indicate another leg to the downside…

Have a great week!

Jerry