Last week's Newsletter laid out recent reallocation decisions we made based on both Elliott Wave counts and traditional technical analysis. We showed how and why the wave count changed once the S&P closed below 4200 on 25 October. It's worth reading again as this weekend's Newsletter is a follow on.
Current Elliott Wave Count & Pattern Recognition
This count tells us that, once wave 2 is complete, the next significant move in the market is lower. As we discussed last week, a wave 2 tends to play out in an a-b-c corrective pattern. That means we are looking for a pull back in price and then another rally to complete wave 2. The count is invalidated on a close above the July high at 4600.
The key long term perspective of the S fund isn't Elliott Waves; it's pattern recognition. The move down from the top in late 2021 to October 2023 was followed by a year long bearish consolidation. The lower trendline of that consolidation was violated on 20 October. This pattern tells us that the next significant move for the S fund is to the down side.
Both of these long term charts have bearish implications. It is VERY important to keep this in mind as we look at the shorter term price charts.
Short Term
In the short term chart of the C fund we have a 5 wave impulse move to the downside from the July high, followed by a very strong recovery rally. This recovery can take price all the way up to 4600 before invalidating the count. Thursday was the only down day since the rally began on 30 October but, that down day took price to support at the 50DMA (green). The question is whether or not that is enough of a pull back for price to continue higher.
The S fund put in a 5 wave impulse move to the downside from its high in July to the October low. It then recovered but DID pull back meaningfully this week. Price found support at the 20DMA and 50 on the RSI. The S fund certainly looks like it wants to rally from here, and it's in a better short term technical pattern than the C fund.
The I fund is similar in the short term. The I fund corrected in a 5 wave impulse move and rallied at the end October. This week, the I fund consolidated with Friday's intra-day low finding support at the 20DMA line and just above 50 RSI.
The F fund bottomed 10 days before the stock funds, rallied off the bottom and consolidated this week. We don't see support at the 20DMA but, RSI has pulled back almost to the 50 line.
The Dollar & Yield
The dollar and yield are 2 charts that we have to watch very closely. Since the January 2022 high, a rising dollar and yield has been bearish for stocks. A falling dollar and yield have been bullish for stocks. This is NOT a maxim. Stocks do not always move inversely to the dollar and yield, but they have since the top in 2022. If the inverse correlation continues, the current charts of the dollar and yield are very important.
The dollar moved higher from a bottom in July to a peak in October. This is when stocks were rallying. The dollar consolidated sideways and broke down through that consolidation on 3 November, and stocks rallied again. The dollar has since recovered back to resistance at its 20DMA and 50 RSI line. This is a classic short set-up for the dollar. If the dollar is down sharply on Monday, it strongly implies a trend change to the downside for the dollar; which means bullish for stocks.
Yield gapped down through its 20DMA line on 2 November. Stocks have rallied as yield collapsed from its peak at 5%. For the past week, yield has been consolidating but has not recovered up to its 20DMA line or 50 RSI line. This is a bit of no man's land. The bias is certainly to the downside but, we could see a push higher to the 20DMA line before the next leg down in yield begins. Again, bullish for the stock funds.
Bottom Line
In the short-term, virtually everything is bullish for the stock funds. A pull back in the C fund like we saw in the S and I funds would have been preferable but not necessary. We have both the dollar and yield in a bearish set-up that is bullish for the stock funds, and the seasonal patterns are certainly in our favor.
In the long term, nothing is bullish for the stock funds. The Elliott Wave count for the C fund and the price pattern of the S fund both call for the next move coming to the downside.
The question you need to ask yourself is this. Am I willing to be in the stock funds for some anticipated short term gains, understanding that the next primary move is likely to the downside?
This is all a game of probabilities! There is no guarantee that the current Elliott Wave count is correct. An aggressive investor might get into the stock funds here, watching the market closely for an exit point. A conservative investor may be happy to avoid the risk and take the G fund gains. It comes down to your personal circumstances and risk tolerance.
Above 4600, the Elliott Wave count gets scrapped. Below 4100, the next wave of the bear market is confirmed. It's a lot to juggle but it gives you clear guide rails to make reallocation decisions.
Have a great week!
The Grow My TSP Team
