It was red across the board for the TSP funds this week. We saw a bit of a reversal on Friday afternoon but, it was clearly a distribution week on the stock market. For the week, the C fund closed down 2.21%, S fund down 1.87%, I fund down 2.62%, and F fund down 0.20%.

This week we’ll take a look at the Big Picture chart of the C fund, a trend line and Fibonacci analysis of the short term C fund chart, and finish up with a moving average analysis of all four TSP fund charts. We also highlight some likely 4 wave ending levels before the final 5th wave of this historic Bull Market commences.

The Big Picture

Below is the C fund daily chart from the CoVid low in March 2020 to present. As you can see, this V wave has been playing out in 5 sub waves. At this point, I’m comfortable in confirming that wave 4 is forming and wave 3 is complete. Based on the Elliott Wave rules and guidelines, we know or have a very high expectation of the following:

  1. Wave 4 cannot tread into the area of wave 1. Therefore, wave 4 cannot go below 3600.
  2. Wave 3 cannot be the shortest wave. Wave 1 is 1400 and wave 3 is 1300. Therefore, wave 5 should be less than 1300 in length.
  3. There is no rule that says wave 5 must play out in 5 sub-waves OR exceed the high of wave 3
  4. Wave 2 and wave 4 should present alternating patterns. Where wave 2 was a flat A-B-C, wave 4 should be a different but equally clear pattern.

Analysis and Wave 4 Projections

Below is a 6 month daily chart of the C fund. We connect the lows to form the ascending trend-line. You can see that, each time price tested the trend-line it found support and continued on to new highs. 2 weeks ago, support at the trend-line gave way and price gapped down. The recovery rally took price back up to the trend-line where support now becomes resistance. Price hit that trend-line and rolled right over. This is a VERY consistent observation in price action. When long term support levels are broken, price often recovers back up to the prior support before rolling over to new lows.

Let’s look at some price targets for wave 4. The first is based on the guideline of Parity. In an A-B-C correction, if the length of A and C are equal, we have parity. In the chart below, I took the Fibonacci retracement from the top in early September to the bottom of A. That gives us the entire length of A. I dragged the top in September to the top of B, which gives us a wave C projection that is in Parity with wave A.

Technical analysis is as much art as science. The pattern has to “look right” and have over lapping data points. In this case, wave C ending at 4225-4250 is consistent with the prior support/resistance level from earlier this summer. If price gets down to 4225-4250 this week, you should expect an Alert. Depending on price action of the C, S, and I funds at the time, I am likely to reallocate partially back into the stock funds at that level.

The next possibility is a wave C extension. Rather than wave C being in parity with wave A, wave C is a 1.618 extension of wave A. We’ve shown how these extension levels work in prior newsletters. Over the past year, we’ve watched the C fund hit one extension level after the next as price moved higher. The same concept works on a price decline. If price collapses through parity, the next support level is the 1.618 extension at 4150. This extension level corresponds to the early summer support/resistance price level. It also corresponds with the rising 200DMA (currently 4138). If price gets down to a wave C extension at 4150, it will have A LOT of support at that level.

The TSP Charts

The C fund chart below shows us price with the 10DMA, 50DMA and 200DMA. From April through the high in September, price mostly found support at its 10DMA line. When price broke thru the 10DMA, it always found support at its 50DMA and moved on to new highs. This changed the first two weeks of September when price fell below the 10DMA and couldn’t get back above it. Next price fell below the 50DMA and the moving average lines crossed to the downside. The 10DMA is clearly acting as resistance at this point. As clearly as the 10DMA was providing support for price to move higher during the bull market, it is now providing resistance and forcing prices lower during the correction.

As bearish as we have been while discussing the C fund charts above, the S and I fund charts have some bullish potential…

Because the S fund has been is a sideways consolidation for almost all of 2021, it has given the 200DMA line a chance to catch up. In fact, Friday’s positive reversal day happened right at support at its 200DMA. This COULD be the set-up that would finally force a breakout on the S fund; in one direction or the other… A gap down below the 200DMA would be a serious problem. Continued support and a gap higher would be extremely bullish.

The I fund is in a similar situation as the S fund. While the I fund has not had as long a consolidation, it has been long enough for the 200DMA to catch up. Like the S fund, the I fund got support at its 200DMA on Friday. The 200DMA and the mid-July low on the I fund are the levels to watch right now. With the big volume selling we’ve seen over the past 2 weeks, the I fund is vulnerable below its 200DMA.

The F fund also reversed at its 200DMA on Friday. With interest rates rising last week, the F fund collapsed down thru its 10DMA and 50DMA before finding support at its 200DMA. As interest rates rise, the price of the F fund goes down; it’s a direct relationship. If I were looking to manage downside risk, I would not reallocate to the F fund under these conditions. The only safety from falling stock prices at this point in the cycle is the G fund.

Bottom Line

September was the worst month for the market in over a year. Having said that, the historical seasonal headwinds are pretty much behind us. The 4th quarter, historically, is extremely positive. There are no guarantees for this year but, IF the S and I funds can rally off of their respective 200DMA lines, they may lead us to new all-time highs. As of the close on Friday, I’m not ready to jump back in just yet but, my finger is on the trigger…

Stay Alert…

Have a great week!

Jerry