It was a rough start to the week but not unexpected as I explained in yesterday’s TSP Update. Tonight’s Alert is really an extension of the Alert we posted on 13 September. To put today’s price action in context, I would highly encourage you to go back and read the 13 September Alert again…
The Big Picture
The Big Picture really hasn’t changed since the 13 September Alert. If this week closes at current price levels or lower, the 4 leg correction is certainly forming. Once the 4 leg is complete, I expect a strong 5 leg that takes us to new All-Time highs. In the mean time, what are we looking at in terms of the 4 leg?
There is no way to know how deep or exactly what pattern the 4 leg will take. After gapping down thru the 50DMA last Monday, the C fund spent the remainder of the week recovering back to the 50DMA. That was the “Dead Cat Bounce”. The C fund could not maintain support above the 50DMA and collapsed today in a big way…
The likely minimum move down is 4235. This is the 23.6% retracement level of the longer leg 3 move. A more likely support level is the 38.2% retracement level at 4038. This corresponds with the lower Major Support Zone in the chart below. We could also see support at the 200DMA line, currently 4127 and rising. These support levels will get firmed up as the correction continues.
Our #1 Rule is Don’t Lose Money. Our #2 Rule is Be in the Stock Funds when the Market is Trending UP.
Friday, 10 September was the first shot across the bow of this correction, as the C fund closed solidly below its 10DMA. On Monday 13 September, we reallocated from 100% stock funds to 50%C and 50%G funds. This reduced our stock exposure by 50% but still kept us in the game if the C fund again found support at its 50DMA.
Last Monday, the C fund gapped down below its 50DMA. We did not change our allocations at that time in anticipation of a recovery rally. We got that recovery rally late last week and the C fund actually poked above its 50DMA. Today’s failure at the 50DMA was the first reasonable opportunity to reallocate to 100% G fund utilizing our market analysis tools.
We reduced our losses over the past 2 weeks by 50% and eliminated all risk going forward. When leg 4 is complete, we will utilize the same type of analysis to move back in to the stock funds and ride leg 5 to new All-Time Highs…
Watch the Fibonacci retracement levels and moving average lines as this correction continues. Once the reversal happens, be ready to get back into the stock funds. As we have discussed in the weekly update show the past 2 weeks, I expect this correction to be fast and deep. BUT, you don’t want to miss out on leg 5!
As always, the Alert and Current Allocations are not meant to be personal investment advice. I am sharing what I am doing in my personal TSP account. Everyone has different circumstances and risk tolerances. You should use the Alert to inform your personal TSP reallocation decisions.