Analysis of stock charts can be used in all kinds of ways and there are lots of tools in the toolbox. I have my favorites, and I mostly use them to manage the short-term risk of being in the stock funds vs. the G fund. This keeps me sort of watching the trees. Every once in a while, it pays to broaden my perspective and take a look at the larger forest. One of my favorite tools for gaining this kind of perspective is Elliott Waves. While not an exact science, Elliot Waves can be used as a road map, showing us where we’ve been and where we are likely headed. This kind of map is invaluable when thinking about risk and managing TSP.
The theory behind Elliott Wave is that the market moves up and down is a series of waves. In an up-trending market, prices move up in 3 identifiable legs and retreat in 2 identifiable legs, for a total of 5 in the cycle. The pattern works for any time frame so it really helps to establish where we are in the short, medium and long term.
The 30,000 ft Perspective
The current Super Cycle Wave began at the low of the Great Depression in 1932. The wave has been expanding for the past 85 years as shown in the chart below. Based on this count, we are currently in the 5th and final wave up of this extremely long- term bull market. It’s very tough to predict just how high prices will go in this last wave up but, we are likely to see the end of this expansion in our lifetime.
The Strategic Perspective
The next chart brings things into a more useful time frame. This Primary Cycle is the 5th wave of the Super Cycle, which began at the low in 2009. The Primary Cycle is expanding in a series of 5 identifiable waves and we are currently in the middle of the 5th and final wave. This is the most important time frame for strategic TSP management. The Primary Cycle will come to an end sometime within the next several years. It is very difficult to predict exactly how high prices will go or when this wave will top out however, once it crests, we will likely experience several years of generally falling prices.
The Tactical Perspective
The next chart gets us down to the tactical level and where the art of utilizing Elliot Waves really comes into play. The Cycle chart is the 5th wave of the Primary Cycle, which began at the low of 2016. The Cycle is expanding in a series of 5 identifiable waves with the current wave count putting us at the beginning of the 4th leg. We need to see the market consolidate, sideways or down, for the next 6 to 8 weeks before moving higher. This will take us to the end of the 4th leg and the beginning of the 5th and final leg of the Cycle. SPOILER ALERT… the current wave count can only be verified in hindsight. My best estimate is that 2400 is the top of wave 3 in the Cycle. It is possible that we do not get a significant pull back or consolidation right now and wave 3 continues. This is a road map not a predicting tool, and there are no guarantees! I expect that we will see a 4 and 5 wave to complete the cycle over the next several months. How does this most likely play out? See the last chart below to find out.
The 6 month daily chart of the S&P500 (C fund) is the 3 wave of the Cycle which began on Election Day 2016. This 3 leg has not expanded in a traditional Elliot Wave fashion. Instead, the 3 leg is expanding in an AB=CD pattern. I would like to see the 3 leg end closer to 2500 but 2400 is close enough. If the market continues down thru the trend line and consolidates for the next few weeks/months then the 4th leg will be in place. If the market expands on Friday’s trend line bounce and closes above 2400 this week, then the 3rd wave is still expanding. We’ll wait and see what happens. 2400 on the high side and 2350 on the low side are critical levels to watch.
So what are the big take aways?
First, we are likely to see the end of this multi-generational bull market in our lifetime. Once it starts down, it will likely take several decades to get to the bottom. This isn’t alarmist, it’s just something to keep in mind.
Second, within the next couple of years we will see the top of the bull market that began in 2009. Having said that, we’re not there yet. The next correction will likely be relatively minor and set us up for a final move up in the current bull market. This is the most important time frame to watch.
Finally, this is a road map and nothing more. It’s a tool we can use to make TSP reallocation decisions based on reason vs emotion. Don’t bet your retirement future on gut feelings, euphoria or fear. Use the tools, have a plan and let’s make some money!