Finally, a relief rally! For the week the C fund was up 6.16%, S Fund up 7.05%, I fund up 7.45%, and F fund down 0.29%. Is the final bottom in place? Are we off to new highs?? No One Knows… Let’s flush out the facts behind the rally!

The Big Picture

We have featured the 2 year weekly chart of the C fund as “The Only Chart That Matters” since mid January. After this week’s HUGE price move, the S&P500 (C Fund) closed right on the 20 week moving average line. Until the S&P500 can get above the 20WMA, there is no hope for a sustained rally to new highs.

Elliott Wave Plan A

The Elliott Wave Theory provides us with a road map for price. It does this by looking backwards, not forwards. This perspective gives us possibilities, NOT absolutes. Below is the “Ideal” impulse wave. IF my plan A is what unfolds then price began wave 5 this week. Plan A fails if price rolls over and closes below wave 4.

We have been posting the C fund chart below as plan A for the past couple of months. The pattern, AT THIS POINT, looks very similar to the “Ideal” impulse wave above. A close below IV would invalidate this pattern.

IF price closes below IV before closing above V, then we will look at plan B.

Short Term

The C fund chart below is where the rubber meets the road in our reallocation decision making process. Prior to 6 January 2022, the 50DMA and 100DMA provided support for price to move higher. Since closing below the 100DMA on 6 January, these moving average lines have provided resistance. Price is now testing these resistance lines again. Until those moving average lines become support again, this rally is suspect.

On the positive side, Friday’s price move came on HUGE volume. This is exactly what we want to see at the beginning of a new sustained rally. Additionally, RSI is now above 50 and its down trend has been broken. This is very bullish for this rally attempt.

The S fund has been in a clearly defined down trend since mid-November. Friday’s breakout above the down trend line is a HUGE first step in validating a new rally attempt for the S fund. Additionally, RSI is now above the 50 line for the first time since November. We can see that on each rally attempt since the January low, RSI never got above the 50 line. On the next pull back, we want to see the 50 line act as support. This will be confirmation that a new sustained rally in the S fund is likely.

The I fund had a very strong week, recovering the majority of losses from the past 2 weeks. Volume on the I fund was relatively strong this week but, price is now butting up against some very serious resistance. I would be surprised to see price get back above 75 without a pull back first.

The F fund has been in a steady decline since peaking back in August 2020. The continued decline in 2022 comes as no surprise as the FED has made it clear that stopping inflation is its #1 priority. As interest rates continue to rise, the price of the F fund will continue to decline. Having said that, the FED often responds to the market (not the other way around). We can see HUGE volume on both up and down days since the February lows. Price continues to decline but, there is strong institutional buying going on in the market place.

Bottom Line

This week is either the beginning of a new, sustained rally OR a wicked Bull Trap/Dead Cat Bounce. Because my Plan A is that price is just beginning wave V, my analysis gives the nod to the Bulls. Unless the market rolls over and closes below the March lows on the S&P500, Plan A is in place.

Unfortunately for us, as TSP investors, this analysis puts us in a difficult position in terms of reallocation decisions. The stock funds are now 6% to 7% above their respective March lows. The next pull back will really tell the story going forward. IF price pulls back on low volume AND RSI can stay above 50, then this rally is in place. If we lose the 50 RSI line and price closes lower than the March lows, then we should expect another major move to the downside. This means that our downside risk, as of Friday’s closing price, is between 6% and 7%.

An Alert will post on Monday morning. The analysis requires some exposure to the stock funds at this point. However, until this rally is confirmed based on what happens on the next pull back, I am cautiously optimistic. In the Alert, I will explain my reallocation decision process and the associated risk.

As always, I will share what I am doing within my personal TSP account. I am NOT recommending that anyone blindly follow my reallocations. There is a significant amount of downside risk in reallocating to the stock funds at this point. We all must make reallocation decisions based on our individual circumstances and risk tolerance.

Have a great week!

Jerry