It was yet another down week for the TSP funds. The S fund ended the holiday shortened week just barely in the green but overall, it was mostly red across the board. For the week the C fund was down 2.13%, S fund up 0.25%, I fund down 1.19%, and F fund down 0.73%.

In this post we lay out the 3 most likely possibilities for the market over the next several months. The good news, all 3 possibilities COULD end with the stock funds at new all time highs by the end of 2022. The bad news, things could get much worse before they get better…

Very Long Term Elliott Wave Count

If we start with the widest perspective and zoom in, here is the monthly chart of the C fund back to the 2009 lows. Price has progressed in a clear 5 wave pattern. Wave V is either complete or has one final push higher. That is the immediate question we will look at below.

Also on this chart is the long term support line. Price currently sits about 35% above this long term support line. We have to be mentally prepared that, at some point, price will again test this line…

Plan A

Now let’s zoom in to Wave V from above, which is playing out in 5 waves from the Covid low.

Wave II was a clear break in the consistent up trend from the Covid low to the top of wave I in August 2020. Wave II played out in a sideways consolidation lasting 2 months. Wave III was a long, relatively consistent up trend from November 2020 through December 2021. Wave IV has played out in an A-B-C correction lasting 2 months. IF Plan A is correct, we are in the early stages of wave V that will take us to new all time highs.

A weekly close below wave IV before exceeding wave III will invalidate Plan A…

Plan B

IF Plan A is invalidated, then Plan B becomes the next most likely Elliott Wave count. In this case, wave V ended at the January 2022 high. Plan B calls for significant price decline in the near term. How low could price go? If C=A then price hits 4000. If C=1.618A then C hits about 3800.

Fibonacci retracement levels give us likely areas of support. The 38.2% retracement level is consistent with wave C as 1.618 times the length of wave A. The 50% retracement level is consistent with support at wave II in 2020. 3400 is the high before the Covid collapse. The 61.8% retracement is consistent with the lows of wave II in 2020. Any of these could provide a final bottom for this correction.

Plan C

There is a 3rd possibility but, you’re not going to like it…

Plan C would ultimately take price to new all time highs BUT, would be gut-wrenching in the process…

The charts below show the 3 versions of the Bullish Flat Pattern. This is a corrective pattern that plays out as a-b-c (A), a-b-c (B), 1-2-3-4-5 (C). The only variations between the three patterns is the height of (B) and the depth of (C).

For a deep dive into Flat Patterns, hit the link below the charts.

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

What This Looks Like For Us

IF Plan C plays out on the C fund, it will look something like the chart below. This would be a long term pattern that would take until late Summer or early Fall to complete. Complex corrective patterns are gut wrenching. If you can’t recognize them as a possibility, you can get crushed at B.

As we’ve discussed many times, there are impulse waves and corrective waves. Impulse waves drive the overall market trend, while corrective waves take some of the wind out of the sails; setting the stage for the next impulse move higher. Impulse waves play out in 1-2-3-4-5, while corrective waves play out in a-b-c; and there are patterns within patterns…

If wave B in the chart below plays out in a 5 wave impulse move, then Plan A is in place. If wave B plays out in a 3 wave corrective pattern as shown in the chart below, then Plan C is in place. A close below 4150 (A) before price exceeds 4650 means that Plan B is in play.

Depending on how fast these patterns evolve, the next several months could be very difficult for TSP investors. We have shown the chart below several times over the past few months. It was taken from Larry Williams at StockCharts.com.

The chart gives us the average daily price of years ending in 2, back to 1952. This is a chart of what the “average” year 2 looks like. IF 2022 goes along with the average, the 4th quarter of this year should be very good for the stock funds.

IF Plan A is what’s happening, then the rally is beginning VERY early in the year. This would certainly be bucking the average year 2 trend but, it is possible.

If Plan B is what’s happening, then the market should continue in a fast steady decline, and bottom out in the Summer. This would set us up for a very strong 4th quarter and be consistent with the “average” year 2 trend.

IF Plan C is what’s happening, then we should see a strong move up to approximately 4800, followed by a 5 wave decline, before bottoming around late Summer. This would set us up for an extremely strong 4th quarter and be consistent with the “average” year 2 trend.

Bottom Line

We are not covering the Short Term TSP fund charts in this post. The day to day price action is not consequential to the bigger patterns we laid out above.

A close below wave IV (4150ish) would invalidate both Plan A and Plan C. The next several weeks will tell us which of these 3 possibilities we’re dealing with. Are these the ONLY possibilities? Of course not… They are the 3 most likely possibilities, in line with Elliott Wave Theory and Pattern Recognition. If other patterns emerge, we’ll deal with them as they come…

Keep in mind the “average” year 2 trend. It calls for continued pressure for the next several months. After that, a HUGE move higher from late Summer through the end of 2022…

Lots to take in here!

Have a great week!

Jerry