It was a rough week for the TSP stock funds. Honestly, things were not looking that bad until late afternoon on Friday. The question is, are we seeing the beginning of a significant correction or just expected seasonal volatility. The answer is, there is no way to know… What we need to do is adjust our TSP allocations to reasonably maximize gains and minimize downside risk in this seasonally difficult environment.

* If you have not read the Weekly Update Newsletter that posted last night, I would encourage you to read it and the article that the Newsletter references *

In the big scheme of things, I am still bullish on this rally. The longer term Elliott Wave pattern calls for another leg higher. Having said that, we have not seen a 4 leg develop on the C fund. There is a high probability that we saw that 4 leg begin this week. The next several weeks could get very difficult.

Long Term Elliott Wave Count

In theory, the long term Elliott Wave count should play out something like the chart below. The first important indicator will be a close below the 50DMA line. The second indicator will be a lower high on the recovery rally, followed by another decline to the bottom of the 4 leg. Once the 4 leg is complete, we should see an explosive 5th leg that takes us to new all time highs.

Short Term Charts

The Dow Jones Industrial Average is leading the market lower. It failed to maintain support above the 35000 level and closed Friday below its 50DMA. Additionally, the DJIA has put in both a lower high and lower low. Any further significant weakness could bring the DJIA down to test the mid-June low. A close below the mid-June low would be a serious structural breakdown for this important index.

The C fund is still above its 50DMA. Throughout 2021, the C fund has consistently found support at its 50DMA and rebounded to new highs. IF we are seeing the beginning of a longer term 4 leg, the C fund will close below its 50DMA and NOT rebound to new highs. That is how we will know that the 4 leg is forming in the C fund.

The S fund has made 2 attempts to break through resistance at 2250. Both of these attempts have failed. On the positive side, each subsequent decline has reversed higher than the previous low. We have a long term bullish triangle pattern that SHOULD eventually resolve to the upside. A close below the prior low at 2150 would be the first big red flag. Failure to make new highs on the rebound would be the second major red flag for the S fund.

The I fund has a similar pattern to the S fund. On Friday, the I fund closed below its support level of 81.5. We want to see support at the 50DMA or lower trend line. A close below 79 and failure to make new highs on the rebound would be a serious problem for the I fund.

The F fund chart is completely different from the stock funds. The F fund has had a nice rally since the March lows but is currently forming a bearish flag pattern. A breakdown below the lower trend line would likely bring the F fund down to the 114.75 area.

Bottom Line

While the long term up-trend remains intact on the C fund, the shorter term charts and seasonal headwinds require us to use caution going forward. I am reallocating my personal TSP account to 50% C fund and 50% G fund. This will minimize downside risk and still allow for gains if the C fund continues its long term pattern of support at its 50DMA and on to new highs.

As always, this Alert is not meant as investment advice. I am sharing what I am doing in my personal TSP account. Members of the site are encouraged to make reallocation decisions based on their personal circumstances and risk tolerance.