This week we're taking a step back to look at the big picture Elliott Wave POSSIBILITIES going forward.
Elliott Waves
For those not familiar with Elliott Waves, here are 2 great resources from Ewaves.com and Wikipedia.com.
Elliott Waves are fractal, meaning they form in patterns within patterns. The patterns look the same on any timeframe and combine over longer timeframes. An Impulse wave moves price in the primary direction, either up or down, in a 5 wave pattern. A Corrective wave moves price in the opposite direction for 3 waves (A-B-C). In this way, we see 5 steps forward and 3 steps back in the primary direction.
Real Life
Below is a chart of the Elliott Wave Super Cycle playing out in 5 waves since the bottom in 1932. Other than perspective which is important, the only significant portion of this chart for TSP investors is wave V; from the bottom of wave IV in March 2009 to present.
Just as the Super Cycle has played out in 5 waves, wave V has also played out in 5 smaller waves. The big outstanding question is whether or not wave V of the Super Cycle is complete. We'll look at the importance of that question in the next few charts.
Long Term Possibilities
The next 3 charts represent possible Elliott Wave counts with respect to wave V.
IF wave V is complete, and the Super Cycle that began in 1932 is completed, then the 2022 high will be the top of the market for many years to come.
IF wave V is not complete, if we get an expanded wave V similar to the expanded wave III, then price would continue significantly higher. The first two charts below show what the beginning of an expanded wave V could look like.
The first chart shows a 5 wave pattern, with an expanded 3 wave, from the low in 2009 to the top in 2020. In this count, wave I of (V) completed at the 2020 top and wave II of (V) completed at the Covid low. For wave I, this is my preferred count. The problem is wave II. The depth of wave II is technically sufficient but the time is not sufficient. Wave I lasted 11 years (2009-2020). It is very difficult to accept that wave II corrected wave I in 2 months. Assuming this count is correct, price is currently forming wave III of (V).
I call this the "best case" for the bullish wave count because, if the A-B-C correction plays out as shown, many investors will be washed out by the completion of wave C at around 3200. This would represent more than a 50% loss of all gains made since the Covid low. Investors were exhausted from the 2022 bear market. A 2023-2024 bear market would have many throwing in the towel. At that point, investor sentiment would be extremely bearish, potentially setting us up for a monster rally of wave 3 of (III).
The next chart I would call the "Goldilocks Scenario".
This is the same as the chart above except wave 2 of 3 is already compete. The 2022 bear market would be the entire correction of wave 1, and price is now working on an expanded wave 3. The scenario includes a "soft landing", no recession, and new all-time highs by late 2023 or early 2024.
And now for the bad news... The vast majority of Elliott Wave analysts, to include Robert Prechter at ElliottWave.com, hold the chart below to be the primary count. In this case, wave V was completed at the top in January 2022. If this count is correct, the market is in the early stages of a very protracted move lower. In this chart I drew how the initial impulse move to the downside could unfold. A close below the October 2022 low gives this count more credibility. A close below 3200, wave C from the Best Case chart above, would confirm this count.
This is Long Term analysis. It tells us the direction of the long term trend and important inflection points. It is NOT designed to be used to make day to day TSP reallocation decisions. It helps us to keep short term market volatility in perspective.
TSP Fund Charts
Friday was a big day for the C fund. In the most recent Members Only Webinar and last weekend's Newsletter, we discussed the potential of support in the range between the simple 200DMA (red line below) and the exponential 200DMA (green line below). After 3 days of support within this range, the C fund exploded to the upside. We also have support at the horizontal dotted line which represents the breakout from the Cup & Handle pattern in early June. Combine all of his with the seasonal tailwinds and Friday's rally should come as no surprise. That's the bullish take-away from Friday's price action.
While a rally from these levels was expected, one day does not make a trend. We still do not have a buy trigger on the C fund. If you are a very aggressive TSP investor, now is a great time to reallocate into that fund. A buy trigger would add validation to a continued rally.
The S fund rallied on Friday but is still far below its 20DMA and technical indicators are not close to turning positive. While the C fund broke out of its short term down trend on Friday, the S fund did not. Historically, the S fund tends to outperform the C fund in the 4th quarter. This is not happening yet.
The I fund rallied this week as the dollar came under pressure. Even with Friday's strong move, price is still within the short term down trend. The dollar is just above support at its 20DMA with no reversal signal at this point.
The F fund is extremely over-sold in the short term but, there is still no indication of a recovery rally.
Bottom Line
2023 has been a bit like crying wolf... The talking heads all called for a recession in early 2023 and then a recovery into the second half of the year. Clearly, that consensus forecast did not play out. Unfortunately, the underlying fundamentals that precipitated the failed 2023 forecast are still in play and have become more urgent throughout the year.
At some point, the FED's rate hiking cycle will have an impact on the economy. At some point, unemployment will begin to rise, housing will begin to crack, and the yield curve will un-invert. These issues do not just go away.
The Goldilocks Scenario is a possibility but it is not the primary scenario for most Elliott Wave analysts. The October 2022 low and the July 2023 high are the two most important levels to watch. A close below the October 2022 low invalidates the Goldilocks scenario. A close above the July 2023 high gives a lot of support for the Goldilocks scenario.
Have a great week!
The Grow My TSP Team
