Sunday Update: 09 July 2017

Current Allocation: 50% C Fund, 50% G Fund

It was another relatively flat week for the market…  Rather than rehashing the same ground we’ve covered for the past several weeks, I thought I’d use this as an opportunity to dive into one of the best tools in my kit, Elliott Waves.  Understanding the big picture of where we are in the market cycle allows us to make educated decisions about risk and opportunity cost when moving between the TSP funds.  Elliott Waves is a great tool for getting your mind around the big picture AND give you an idea of where we are LIKELY going in the short run…  (For more on Elliott Waves, buy the book here.)

The IDEAL theory of Elliott Waves is laid out in the picture below.  When the market trend is up, we get a series of 5 waves up, 3 waves down.  When the trend is down, we get 5 waves down, 3 waves up.  The pattern is always the same.  All that changes is the time scale (patterns within patterns).  Take a look at the ideal below and then we’ll see how it looks in real life today…

The Big Picture

2009 was the last major market low and the beginning of the current 8 year long stock rally.  The chart below shows the big picture of where we are within this 10 year cycle.  If you compare the ideal chart above to the actual chart below, you can see the value in this tool.  You can also see that we are nearing the end of this bull market.  The 2016 low marked the end of wave 4 and the beginning of the final wave up in this rally.  

Now that we know where we are in the 10 year cycle, let’s drill down to a 2 year and 6 month time frame that we can use to make reallocation decisions. 

Long Term

The chart below is a close up of the V wave above (the 2016 low to present).  This gets a bit tricky because there are waves within waves.  Elliott Waves show us probabilities.  I am laying out what I see as most probable to complete wave V.  This is NOT an exact science and certainly has it’s share of critics but, if you get good at counting the waves, it can be one of the most useful tools in the kit. 

Within wave V below there are 5 waves.  By my count, we are most likely approaching the end of wave (3).  This SHOULD be followed by a wave (4) correction and set us up for one final push to wave (5) by late 2017 or early 2018.  Based on my count, this is what is most PROBABLE over the next 6 months.  

Short Term

The next chart shows us the short term and what to expect in the coming weeks to complete wave (3).  This is really where the rubber meets the road in terms of reallocation decisions.  There are only 2 possibilities in the short term.  Most likely is 1 more move up to complete wave (3).  Friday’s bounce off the 50DMA and above the 2405 level would be the perfect beginning of the next move up.  Both the RSI and MACD seem to support this.  The second possibility is that wave (3) was completed at the high on 19 June and we are currently in process of completing wave (4).  IF we crash down thru the 50DMA then the count changes and this becomes the primary possibility.  A close below 2350 confirms this second possibility.  In either case, the next time the S&P500 hits the 2300-2350 level, wave (4) will be complete and a final wave to (5) will begin.  

Wrap Up

If you’ve followed me this far, here’s one more chart as a glimpse into 2018 and beyond…  The 3 wave correction, following the 5 wave move up that began in 2009, is likely to play out something like the chart below.  Again, this is not an exact science but it pays to be forewarned.  Once the top is in, the next several years are likely to be extremely difficult.  

Have a great week and please post questions to comments.

– Jerry