It was another constructive week for the TSP stock funds.  The C fund advanced by 2.13%, the S fund was up 0.11% and the I fund eked out a gain of 0.09%.  While it was a positive week, a continued move higher from here is looking unlikely….

** This post is based on the current MOST PROBABLE Elliott Wave Count.  A close above the September high invalidates the count! **

 In this post we’re going to take a look at Elliott Waves and Fibonacci Retracements.  These tools can help us identify PROBABLE market tops/bottoms and PROBABLE price reversal targets.  First we’ll look at the Theoretical Elliott Wave Cycle and compare it to the actual 12 year monthly chart of the C fund.  This will give us a guide and help manage expectations of price direction over the next couple of years.  Finally, we’ll take a look at the 1 year daily chart of the C fund and see what the Fibonacci retracement lines tell us about prices continuing higher in the short term.

Elliott Waves and Fibonacci

The diagram below is the theoretical Elliott Wave market cycle; a combination of an Impulse Wave and a Corrective Wave.  The Impulse Wave advances the market in 5 steps while the Corrective Wave takes back some of the advance in 3 steps (A-B-C).  The model is Fractal (patterns within patterns) so it’s critical to understand the time frame you’re dealing with.  For a given time frame, the trend is in the direction of the Impulse Wave.  Once 5 steps are complete, we should expect a 3 step correction followed by another 5 step advance.  This works in both the positive and negative directions.  This Wikipedia page provides a great overview of Elliot Wave rules and fibonacci relationships.       

If you look at the ideal market cycle diagram and compare it to the C Fund 12 Year Monthly chart below, you can see that the long term Correction Wave is LIKELY just beginning.  I say likely because the wave count can only be confirmed in hindsight.  The most probable wave count puts us between (1) and (2) in the diagram right now.  IF this count is correct, we have a long corrective wave ahead of us.  How low is the correction wave likely to go?  We have 2 rules to help anticipate.

First, in the ideal market cycle, the correction wave retraces back to the 4 leg of its fractal.  For each of the mini-cycles within the complete cycle below you can see that each a-b-c corrective pattern retraces back to the 4 leg of the previous impulse wave.  If we apply this to the C Fund chart below, the A-B-C pattern takes us down to 1800.  

Second is Fibonacci Retracement Levels.  During correction waves the price tends to retrace back to one of the 3 primary Fibonacci levels, 38%, 50% or 62%, where 50% is most common.  If you apply this to the C Fund chart below, the 50% retracement level lines up with the 4 leg of the Elliott Wave pattern at 1800. Additionally, the all-time high on the C Fund chart below is 2940.  A retracement down to 1800 represents a 38% decline in total price.  1800 is the IDEAL ending price for the A-B-C correction.  

Switching gears to the 1 Year Daily C Fund chart below, we can see that market put in a low at 2600 in late October.  Prices recovered back to the 62% fibonacci retracement level before rolling over again late this week.  The short term patterns create the long term patterns.  As long as the price stays below 2940, this wave count will remain in effect.  We should expect some volatility going forward with the 2 most important prices to watch being 2940 and 2600.  A close below 2600 will confirm the major correction that seems to be setting up…

Below is another look at the 1 Year Daily chart of the C fund with 50DMA and 200DMA.  The market found some support at the 200DMA on Friday.  We could see a run up to test and possibly get above the 50DMA before rolling over.  This would give us a nice a-b-c retracement and set us up for the next expected decline.

Elliott Waves, Fibonacci retracement levels, and moving averages give us guidelines and targets where we can expect prices to change direction.  They are guidelines.  Reading charts is as much an art as a science so don’t get hung up on exact numbers.  The market looks to be forming a long term top.  As volatile as October was, if we don’t get a close above 2940 relatively soon, we are likely to go much lower from here.  Market risk is very high…

Happy Veterans Day!

Jerry