Extreme volatility continued this week! The market is churning, trying to decide if we get one more gasp (or more) higher before falling off the cliff… For the week the C fund was up 4.74%, S fund up 3.73%, I fund up 3.54%, and the F fund down 0.94%.

There was quite a bit of angst around the Alert that posted on Tuesday morning. If you haven’t made the time to read the Alert Analysis, please do that. It describes clearly what generated the reallocation, the potential risk/reward, and my absolute line in the sand for moving back to the G fund if this rally does not grow legs.

I do not believe that we have seen the bottom of this Bear Market. Having said that, bear markets are punctuated by extremely strong counter-trend rallies. If this rally takes hold, it could take us through the end of 2022. If it does not take hold, there will be no Q4 rally and the market will likely drop off a cliff… The key is to be ready for either possibility.

In this post we lay out the bullish case for stocks in the short term. The market is definitely in a long term down trend but, we are at a level that supports a tradable bottom. As the Bear Market continues to unfold, these tradable bottoms are the only way we can achieve any significant gains in the core TSP funds.

The first chart shows the C fund, on a weekly basis, all the way back to 1980. We can see that every time price corrected back to the 200 Week Moving Average (WMA), it found support and continued to new highs. This was not true in 3 instances, 2001, 2008, and Covid. Clearly, the 200WMA is a MAJOR support level. We need to give this level the benefit of the doubt until proven otherwise.

The chart below is the same as above but, drilled down to the past 5 years. We can see that price has been fighting for support at the 200WMA for the past several weeks and has not closed below it. The line (wick) below the 200WMA was from last Thursday’s intra-day low that did break 3500 but rallied to close the week above the 200WMA.

IF this bear market is only a correction, price will play out in some kind of corrective pattern. The most common corrective pattern is an A-B-C where the length of XA=BC. If we lose support at the 200WMA without a Q4 rally, the most likely target to the downside is approximately 3200. I would consider this the best case scenario.

This is the same chart as above with Fibonacci retracements drawn from the Covid low to the January 2022 high. We can see that the 61.8% retracement level is right at 3200. If we lose support at the 200WMA, the A-B-C corrective pattern is supported by this Fibonacci retracement level. This is actually an extremely bullish interpretation that is consistent with my alternate Elliott Wave count presented in the 09 October Newsletter.

The next 2 charts are short term and explain the Elliott Wave count that led to Tuesday’s Alert. The June low was the first test of support at the 200WMA, following a 5 wave impulse move lower from the January 2022 high. The summer rally gave us a wave II. Following the August high, price progressed lower in 5 waves to end last Thursday. If this count is correct, last Thursday’s low is the completion of the first wave down of the longer wave III and price is now forming wave 2 of III.

If we drill down to an hourly chart, we can see how price acted coming off the bottom of wave V. We got a sharp up move for wave 1, followed by a higher low for wave 2. Wave 3 is now playing out. Ultimately, the rally that is underway will correct the move from the August high. Likely retracement levels are shown. Price could rally all the way up to 4300 and this count would still be correct. IF price were to rally past 4300, the long term bearish count would be invalidated.

For our purposes, a close below the wave 2 on 17 October would invalidate the short term count on this hourly chart. That wave 2 completed at 3575. That is how I determined my line in the sand at 3570.

The TSP Fund Charts

A buy signal triggered officially on Friday. Price closed above the 20DMA, RSI is above 50, CCI is above 0, and MACD has crossed positive. This is the 4th buy signal we have had in 2022. 2 out of the last 3 buy signals were successful. The late May buy signal rolled over within several days so, I would call that a failure. Given support at the 200WMA, extreme oversold conditions, extreme bearish sentiment, and seasonal tailwinds, I would not be surprised to see price rally up to the down trend line at 4100.

The technical indicators are not as strong for the S fund but, the S fund does have a clear double bottom pattern at 1500. That is the line in the sand for the S fund. I would sell the S fund on a daily close below 1500. Potential upside is the August high at 1850.

The I fund also triggered a buy signal at Friday’s close. With 55.75 as the double bottom, that level would be my line in the sand. The I fund is highly inversely correlated to the price of the U.S. Dollar (ticker symbol $USD). If the dollar continues to fall, the I fund will continue to rally.

The F fund continues its historic decline. There is no way to know when a reversal will come as the chart is already extremely extended to the downside. The eventual counter-trend rally in the F fund should be extreme. We want to pay close attention and reallocate to the F fund once it begins.

Bottom Line

Seasonally, the last week of October tends to be negative for the market but this sets us up for a big move into November and December. Years ending in 2 and the mid-term election cycle are also very bullish for stocks historically. The current short term rally looks to be taking hold. I would give it the benefit of the doubt for the next several weeks. In the big picture, a close below 3500 is really the line. This would be a close below the 200WMA and an invalidation of the short term count. If you are less risk averse, the 3570 level is still valid in terms of invalidating the short term trend.

It looks like we have further upside to go in this rally. If this rally grows legs and price gets up to the 4000 area, the media will declare that the Bear Market is over. DO NOT believe it. This is (almost) definitely a bear market rally. Watch the price pattern over the next 2 weeks. If it’s a corrective pattern, we’ll know for sure that its just another bear market rally and price will eventually roll over to new lows.

Have a great week!

Jerry