Sunday Update: 19 May 2019

It was a wild ride on Wall Street this week.  The market gapped down on Monday morning, losing about 3% by the middle of the day.  It took until mid-day on Thursday to recoup the losses.  Unfortunately, just as we were testing last Friday’s high, the market rolled over and finished for a loss.  For the week, the C fund down 0.76%, S fund down 1.74%, I fund down 0.86%, and the F fund up 0.33%.  

We’re going to take a look at the short term chart of the C fund with moving average lines and technical indicators, then move on to 3 possibilities going forward based on the Elliott Wave Count.  We’re in a bit of a grey area right now.  We need to let the pattern play out a bit more to reduce the number of possibilities.  This may take a week of two and will likely include some serious price volatility; either up or down…  

Short Term

The short term chart of the C fund below just does not inspire confidence.  The C fund gapped down thru its 50DMA on Monday and spent the remainder of the week clawing back up to that level.  Thursday did close above the 50DMA but it did not close at the high of the day.  This led to Friday’s reversal and the weekly close below the 50DMA.  In addition to the poor daily price action this week, the technical indicators look ready to move lower.  Based on this chart, I would expect the markets to move lower next week.

Elliott Wave Count 3 Possibilities

I like to use Elliott Waves because it gives me a structure at multiple time frames.  Knowing where we are in the long term wave cycle is EXTREMELY helpful.  It puts left and right limits around the short term reallocation decisions that we make to grow our TSP accounts.  Right now, the count is unclear.  Until the pattern plays out a bit and the count is resolved, we will rely more on the other technical analysis tools (like the chart above) to help make decisions as necessary.   

Possibility #1

If we look at the C fund since the 2009 low, the chart has unfolded in 3 complete waves.  The question mark right now is wave 4.  IF wave 3 was completed at the January 2018 high then wave 4 is playing out as an expanding triangle.  In that case, we need to see a wave e that ends with prices below the December 2018 low to complete the pattern.  At that point, wave V would begin and take us to new all-time highs.  HOWEVER, it’s a big drop between where we are now and the bottom of wave e…    

Possibility #2

IF wave 3 was completed at the October 2018 high, then wave 4 was completed at the December 2018 low.  If this is the case then the current rally from December 2018 to May 2019 is leg 1 of wave V.  The correction we have seen since early May would be the beginning of leg 2 of V which could bring prices much lower; possibly as low as 2575.  We will not be able to confirm this unless/until we get new highs with a strong breakout to the upside.  

Possibility #3

Possibility 3 is a variation of possibility 1.  If the a-b-c-d-e pattern ultimately plays out, the May high may not be the final d wave.  It is possible that the C fund could rally from its 50DMA or 200DMA and push to new highs before rolling over to wave e.  This one could cause problems for us given the 2 trade per month rule.  We will have to watch the price/volume action and indicators closely to distinguish this from Possibility 2.

Bottom Line: We need to let the pattern play out for a few weeks before the wave count can be certain.  All 3 of these possibilities include short term falling prices but longer term higher highs.  It’s going to be a very volatile summer!  If you don’t have the stomach for it, will be gone on vacation, or just want to play it safe, I would be out of the stock funds on a weekly close below 2775 or 2950; which ever comes first…

Have a great weekend!

Jerry