This newsletter is going to be an After Action Report (AAR) on the last 2 Alerts, the Elliott Wave count going forward, and a deep dive into the TSP fund charts. On Wednesday this week we will post a Market Update regarding the dollar and 10 year yield charts, and their implications of possible reallocations going forward. You don't want to miss that Market Update!
Each reallocation is unique. With each reallocation, we evaluate the technical conditions at the time and make a decision about future price movement. That's actually the easy part. The more challenging, but critically important part, is determining when the decision was wrong. We generally call this the "line in the sand". Every time the market goes against us, we go back and do an AAR. Why did the market go against us? Did we miss something? How could we have made a different decision given the data we had at the time? Here's a quick recap of the last two Alert Analysis posts.
AAR
The 20 October Alert reallocated the Grow Model Portfolio to 50% C, 50% G. In the analysis, we showed the following 2 charts for the C fund. The weekly chart shows a breakdown below the 20WMA in September followed by 3 weeks of support at around 4300. In the final week, price put in a bearish engulfing candle, closing the week below 4300. For the rally to continue, price had to get back above a now down sloping 20WMA. The bearish engulfing candle made that very unlikely.
The daily chart shows the 4200-4300 support/resistance zone. The July peak to the September bottom played out in an a-b-c pattern down to almost 4200. This was an excellent place for the market to rally, and it did. Price got back above the 20DMA but failed. This failure put the larger a-b-c pattern in doubt. A close below 4200 would invalidate that a-b-c pattern. If price reversed before taking out 4200, there was potential for a monster rally, consistent with seasonality, into the 4th quarter. Taking both of these scenarios into consideration was the reason for the 50% C, 50% G allocation.
Not shown in the Alert Analysis was my primary Elliott Wave count at the time. If the 4200 level could hold, wave 5 to the upside had begun at the low of wave 4. If the low of wave 4 (4200) was violated, wave 5 had not begun, this Elliott Wave count would be invalidated, and a reallocation to 100% G fund would be triggered.
In hindsight, we know that price failed to stay above 4200 and a new reallocation was triggered 6 days later. The question is, could we have made a different decision given the price action at the time? We accounted for price moving in either direction. We had a line in the sand at 4200 to manage downside risk. And, we had an excellent set-up for a wave 5 rally. I don't see a better decision process given the price action at the time.
The 26 October Alert reallocated the Grow Model Portfolio to 100% G fund. The Analysis began with the following.
"In the 20 October Alert Analysis, we explained in detail the rationale of reallocating from 100% C fund to 50% C fund, 50% G fund. While we had a clear sell trigger for 20 October, the strong seasonal tendencies for a Q4 rally were not ignored. Our line in the sand was a daily close below 4200 for a subsequent reallocation to 100% G fund.
On Wednesday, 25 October, the S&P500 closed at 4186; a clear violation of the 4200 level. At this point, a continuation of the down trend is much more likely. We now have consistent lower highs and lower lows since the top in early August. The break below 4200 also changes my primary Elliott Wave count. All indications are that wave C or 3 is in process."
The chart below was from the 26 October Alert Analysis. It shows our new primary Elliott Wave count which is still in place, even after this week's monster rally.
If we drill down to a daily chart, could we have made a different decision? Could we have made a decision that would have kept us in the 50% C, 50% G fund allocation after the breakdown below 4200?
Looking at this daily chart from 26 October, price was below 4200, below the 20DMA, and below the trendline that began at the October 2022 lows. RSI, CCI, and MACD were all negative and declining. We have no divergence between price and RSI to give us an indication that momentum is shifting. Price closed at the bottom of the days trading range and the bottom of the weekly trading range on 27 October. There is nothing here to indicate an impending reversal to the degree we saw this past week.
What did we miss? Could we have looked at these charts or other data at the time and made different decisions? We don't see it, and that is the most frustrating result of this AAR. If any of you are seeing anything in these charts that we are missing, please email us at support@growmytsp.com. Any constructive feedback is very much appreciated!
The Elliott Wave Count Going Forward
A look at the Elliott Wave count going back to the top in January 2022 is very interesting. The move down from the January 2022 high to the October 2022 low traced out a 5 wave leading diagonal pattern. We then got a complex a-b-c recovery rally that completed at the July 2023 top. The correction from the July top to the October bottom is also a 5 wave leading diagonal. This week's rally, once complete, will be wave a. We should then get a pull back to support above the October low for wave b, followed by another rally to complete wave 2. At that point, the larger downtrend should continue.
There are multiple ways that the pattern could play out. The two most important price levels are 4600 and 4100. If price closes above 4600 (II or B), this pattern is invalidated. If price closes below 4100 (the October low), the larger downtrend is underway. Anything that happens between these levels is part of the current a-b-c corrective rally.
We talked about the possibility in the chart below in last weekend's Newsletter. In that Newsletter we looked at both Elliott Wave and Stock Trader's Almanac. We said one or the other would be right, and possibly both could be right. After this week, the Stock Trader's Almanac seems to have nailed it! Elliott Wave can still be right, as long as price does not exceed 4600. If the next two months play out something like this chart, both will be right. We would have had a significant Q4 rally and a set-up for the next major decline. This is also a set-up that could work very well for us. A pull back to 4250 or lower would be ideal. This would close the gap from Wednesday into Thursday of last week and set us up for a tradable upside rally.
The TSP Fund Charts
On a weekly basis, there are certainly some similarities between this week's price action and the bear market rallies of 2022. This is why the next pull back is so important. If the pull back turns into lower lows, like in March and July 2022, we know the downtrend continues. If the pull back gives us a higher low, like November 2022, then we have a potential new up trend.
The S fund chart just looks ugly! The year long bearish flag pattern finally broke to the downside in mid-October. The patterns don't always play out as expected but, this one was text book. Price SHOULD be continuing lower. This week could be just a relief rally. Like the C fund, we need to see what happens on the next pull back. The macroeconomic factors potentially affecting the S fund are different than the C fund. This is a topic we will discuss in detail in Wednesday's Market Update.
The I fund pulled back to a clear support/resistance channel and rallied sharply as the dollar collapsed this week. With RSI above 60, the I fund breakout is stronger than both the C and S fund breakouts. Again, the next pull back will tell the story.
The F fund is a very important chart to watch. As we've been discussing for months, IF wave 5 is complete, the F fund should rally to 101 at a minimum and potentially as high at 118. What's interesting at this point is stocks and bonds still moving in the same direction. This is another topic we will discuss in Wednesday's Market Update.
In the short term, the F fund is still well below the down trendline. The F fund has become so extremely oversold that a relief rally was inevitable. Price has exceeded the most recent high at 94. If the next pull back can stay above the October low, wave 5 could be complete.
Bottom Line
It was a gut wrenching week to be in the G fund. Having said that, even with the benefit of hindsight, we cannot identify a reason, given the price action at the time, for not reallocating to the G fund on the break below 4200. The breakdown through this level changed the bullish Elliott Wave count to a bearish count and price was below both the long term up trend line and the 200DMA line.
What matters now is price action on the next pull back. A pull back to lower highs sets us up for a rally into the end of the year. A pull back to new lows tells us the downtrend continues.
There were important macroeconomic events last week that affected yield and the dollar. The initial market reaction to these events was very bullish. We will discuss these events, the chart of yield and the dollar, and possible TSP reallocation scenarios in Wednesday's Market Update.
Have a great week!
The Grow My TSP Team
