Weekly Update Newsletter: 29 November 2020
It was another strong week for the TSP stock funds. Even though the market was only open for 3 and 1/2 days this week, we saw some really strong gains after finding support at the 10DMA (Day Moving Average). For the week the C fund was up 2.27%, S fund up 4.42%, I fund up 1.93%, and F fund down 0.03%.
Two questions that are always on the mind of TSP investors. Where are we now? and Where are we headed? The answer to both questions are relative. If we can get the first one right, we have a chance of being correct on the second question. We’re going to take a crack at both questions using a 4 year daily and a 4 year monthly chart of the S&P500 (C fund).
Perspective, in terms of technical analysis and applying it to TSP investing, means looking at the same chart over varying time frames. This gives us a full picture of price on a relative basis. The 2 charts below are 4 year daily and 4 year monthly. While they cover the same 4 year period, each gives us a different perspective of what price is doing.
We’ve been talking about this Megaphone pattern since late 2019. The Megaphone is probably the worst pattern because it’s very difficult to define exactly when price is out of the pattern. The definition is higher highs and lower lows. While the upper and lower channel lines help us identify the pattern, they are NOT an exact science. Depending on where we draw the upper channel line, price is either hitting resistance (dotted line) or price has found support above the channel line (blue). We have to let this play out before confirming that we are actually out of the pattern…
The 4 year monthly chart below gives us a much different perspective than the chart above. We had a run up in 2017 to the January 2018 high. After a 2 month correction, price pushed to new highs again in September 2018. In late 2018 we had a 2 month correction that took price to lower lows vs the January correction. We then had a run up to new highs in February 2020, followed by a 2 month correction to lower lows. Then again, price ran up to new highs in August. We had 2 months of correction (September and October), but DID NOT get lower lows. This is a great first step! Then we had an explosive month, similar to past months coming off a 2 month correction. To me, it looks like price wants to go higher from here.
On a day to day basis, the C fund is looking great. Following a strong move off the late October low, the C fund consolidated to its 10DMA and popped higher on Tuesday. This gave us a follow thru day on big volume! The technical indicators have room to move higher…. While it is always possible, there is no reason to expect the C fund to roll over from here.
The S fund is a different story… While the C fund is just beginning a move higher from support, the S fund is EXTREMELY over extended. While it is possible that price could continue higher, I would not be surprised to see the S fund pull back a bit over the next week or two. A pull back to its 10DMA would be very healthy at this point in the rally.
The I fund is almost in between the C and S funds in terms of the chart pattern. The I fund broke out of a long term flat consolidation after hitting the 200DMA in late October. That breakout was a 17% move in the month of November! We then saw a short consolidation at 70 to the 10DMA, and a move higher this week. The I fund is over extended but, having found support at its 10DMA, I would not be surprised to see price continue higher.
Bottom Line: While I cannot yet confirm that we are out of the Megaphone pattern for good, I am cautiously optimistic. My optimism comes from seeing the chart through different perspectives. It has nothing to do with who won the election, the virus, the vaccine, the rising price of oil… Watch the charts.
Have a great week!