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.
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.
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