It was a mixed week for the TSP stock funds with the C fund advancing 0.85%, the S fund declining 0.61%, and the I fund crushing it by 2.8%.  For the I fund, that comes on the heels of last week’s 2.03% increase!   We’ll get to the short-term later in the post.  First, let’s get some perspective with a 10 year view of each stock fund.

Long Term

Bull and Bear markets tend to unfold in identifiable Elliott Wave patterns.  They also tend to advance and retrace consistent with the Fibonacci sequence.  The chart below shows the C fund from the low in 2009 to present.  The best estimate is that we are currently in the 5thand final step of this rally.  We use short-term pattern analysis to determine the actual top of the rally but, it’s getting close…

Let’s assume that the top is in at 2932.  If this were the case, how far would the market retrace based on the Fibonacci sequence? The most common retracement level is 50%.  The next 2 most common levels are 38% and 62%.  A 38% retracement would take us down to the top of the 3 leg at about 2100. A 50% retracement would take us down to the bottom of the 4 leg at about 1800.  This is consistent with the “ideal” Elliott Wave corrective pattern. When the next correction happens, I would expect the C fund to get down somewhere between 1800 and 2100.  This will not happen over night.  Once it begins, the correction should play out in 3 distinct legs over months/years.

These numbers will all change when the actual top is identified.  I’m laying this out to manage expectations and give an idea of what the next several years could look like.

So how will we know when the top is actually in?  Trend line analysis is one of the best tools in the box for this.  The C fund chart below shows the short-term (2 year) and long-term (10 year) trend lines.  Each time the market has hit the short-term line since 2016, it has rallied higher. When the market does break below this line it will be a giant red flag that the top could be in.  If it continues down from the 2 year trend line, the next major support is the 10 year trend line.  If it still continues down, we will be looking for support at the Fibonacci levels. 

The long-term chart of the S fund looks very similar to the C fund.  The 5 step Elliott Wave pattern is playing out in a similar manner along with the long and short term trend lines.  One of these funds will lead us down but both will top out close to the same time.

The I fund needs one more short-term leg up to complete its Elliott Wave pattern.  It looks like the I has found support at its short-term trend line.  A monthly close above 70 will confirm a new short-term rally for the I fund.  It’s possible that we could see the I fund rally for the next few months but not get above its January high before rolling over. This would still meet the 5thleg requirement so, if the C and S roll over in the coming months, I expect the I fund would roll over as well.

Short Term

We don’t have an easily identifiable wave pattern since the April low for the C fund. The 50DMA will be an important support level on the next short term correction.

The S fund has established a pretty strong trend line since its April low.  A close below this line would be a red flag.  When that happens we will be watching closely for some kind of topping or consolidation pattern.

The I fund is out of sync with the C and S in the short term.  In the past 2 weeks, the I fund has rallied back thru its 50DMA and up to its 200DMA.  I expect the I fund to succumb to resistance at the 200DMA and roll over a bit from here. Ideally it would then find support at the 50DMA and explode higher thru the 200DMA.  This would be confirmation of the beginning of the 5thand final leg up for the I fund; and a great short term buying opportunity.

We have covered a ton in this post.  Here’s the bottom line.  The overall rally has not topped out yet.  In a perfect world, the I fund would rally for a few months and then all 3 TSP stock funds would roll over together.  That may happen but, we are definitely not in a perfect world.  October is right around the corner and it is notorious for market crashes.  At a minimum, you should expect some serious volatility over the next 6 weeks or so. Let the trend lines be your guide. 

Please post questions to comments or FaceBook and have a great week!

Jerry