What a week for the TSP! Having just come off the worst month since 2008, early this week we get the biggest rally since blasting out of the CoVid bottom! Unfortunately, that rally was short lived…

If you’ve been riding the G fund for the past week or so, are you itching to get back into the stock funds? Is now the time or, is the market getting ready to roll over again? If you’ve been riding the past couple of months in the stock funds, you’ve got about 38% of the January losses back. Do you stay in the stock funds and hope the rally continues? Or do you move to the G fund, thankful for recouping 38%? Regardless of your current allocation, you need to be thinking about the set up for your next move… This newsletter might give you some things to think about.

While much of the gains we saw this week drained away by the close on Friday, it was still a green week for the TSP funds. The C fund ended higher, gaining 1.55%. The S and I funds both had a strong week, up 2.82% and 1.79% respectively. After a very tough Friday session, the F fund finished the week down 0.97%.

The 2 Most Important Events of the Week (Beyond Facebook’s collapse…)

Last week we talked about the 2 possible Elliott Wave counts going forward into 2022. On Wednesday this week, the option likely in play became much more clear for a very technical reason… This was confirmed again on Friday.

There are many guidelines associated with Elliott Waves but ONLY 3 RULES:

  1. Wave 2 cannot retrace more than 100% of wave 1
  2. Wave 3 can never be the shortest of waves 1,3, and 5
  3. Wave 4 can never overlap wave 1

Rule #3 was violated on Wednesday and again on Friday. If you’re not a serious Elliott Wave geek, you probably missed this. Here’s what it looked like on the chart.

Wave 1 from the January high hit an intra-day low of 4582.24. The rally that ended on Wednesday was considered to be wave 4. Once price rallied above the low of wave 1, the pattern is no longer valid. Wednesday’s intra-day high was 4595.31, exceeding the wave 1 low of 4582.31. Therefore, the January correction played out in a 3 wave pattern and is NOT an impulse wave.

The second violation of this rule happened on Friday when the intra-day price overlapped into the area of the 1 wave from the 24 January low.

Why are these so significant? At this point in the correction, we do not have an Impulse wave; either up or down. The 2 primary waves since the January top have been a-b-c corrective waves. (In Elliott Wave labeling, numbers connotate Impulse waves while letters connotate Corrective waves). Here is the updated chart and labeling:

With the downside impulse wave pattern invalidated on Wednesday and the upside impulse wave pattern invalidated on Friday, it looks like the correction is playing out in a bullish “Flat Pattern”.

The Flat Pattern

There are 3 possible bullish flat patterns. All 3 patterns are very similar. The only differences are the height of (b) and the depth of (c). What’s important is that this is a corrective pattern. The flat pattern is an a-b-c correction, an a-b-c recovery rally, and a 5 wave move lower to (c). Wave (c) should complete a little above, a little below, or equal to wave (a).

https://fbs.com/analytics/guidebooks/zigzag-and-flat-patterns-270

The Flat Pattern is CORRECTIVE. Either wave IV put in a low in late January OR wave IV is still in process. Either way, the BIG take away is that after wave IV comes wave V to new all time highs!

The TSP Fund Charts

The C fund put in a low on 24 January. Price then rallied back to the down trend line before rolling over. As of the close on Friday, price found support at its 10DMA and 200DMA. Price needs to get above the down trend line to call the all clear from this correction.

This week the S fund got back above its 10DMA for the first time in 2022. Support held on Friday after testing the 10DMA on Thursday. If price can get back above 2000 before it breaks below 1800, it might be putting in a low…

In late January, the I fund broke down through long term support at 75. This week, price rallied and is now back in the trading range. Support at the 75 level must hold on the next re-test OR we are looking at another leg down.

The yield on the 10 year treasury bond exploded higher to 1.916% on Friday. This resulted in a collapse of the F fund. Last week, the F fund found some support just below the March low. As we pointed out, lower lows is a problem… The F fund is not a great alternative to the G fund at this point.

Bottom Line

First, the S&P500 (C fund) is in a corrective pattern that should complete around 4200, clearing the way for wave V taking price to new all-time highs.

Second, until wave IV is complete, volatility will continue to frustrate TSP investors. Once wave IV is complete, we should see price begin to stabilize with an impulse move to the upside.

February is seasonally the second worst month of the year for stocks and is likely to be extremely volatile this year.

Frustrating as it may be, this level of volatility will crush us given the 2 IFT rule and the Noon rule. Whether you’re currently allocated in the stock funds or the G fund, be there for a reason and draw your lines in the sand.

Have a great week!

Jerry