My name is Philip W. Knerr. I wear many hats, one of which is to analyze the financial markets. My analysis is heavily based on Elliott Wave theory. Other fundamental and technical factors are considered, as is plain old common sense.

I’d like to make my analysis available to those who might be interested in reading it. The markets are starting to get more interesting. Correct action is going to become very important in the immediate future.

This first article is my analysis of the markets as they stand as of the close of US-based trading on Thursday, August 17, 2023. Data are current as of that time. “Today” is relative to that date (despite this article being published on August 18 in the Central, Eastern, or GMT time zones).

Over yesterday, Wednesday, August 16 and today, Thursday, August 17, the following indices have declined in a way that looks clearly impulsive:

• DJIA
• S&P 500
• Nasdaq Composite
• NYSE Composite (with more of a retracement than in the other indices noted)
• S&P 600 (small caps)
• S&P 400 (mid caps)
• S&P 100
• NDX (Nasdaq 100)

Over the same time period, $VIX also looks impulsive, but in the opposite direction. It has been gradually increasing over yesterday and today.

The percentage of NYSE stocks which are above their 200 day moving average (MA) has declined to 51.05%. However, the average itself is significantly above its MA, by 5.9%. This suggests a lopsided market, wherein a handful of relatively strong companies are carrying the market, and the typical company is already rolling over below its MA. Moreover, the corresponding percentage of S&P 500 stocks which are above their 200 day MA has declined to 53.60%. The fact that this discrepancy is less pronounced in the S&P 500 provides further support for this observation, if the companies carrying the market are large enough to be included in that index.

The S&P 500 is already below its 50 day MA by 1.8%. 34.40% of S&P 500 stocks are below their 50 day MA’s. Thus, we’re already meaningfully below the 50 day MA, which shows near-term weakness.

On the NYSE today, 30% of stocks advanced and 67% declined, which is more than a 2:1 ratio. The S&P 500 was down 0.77%. Thus, the decline is both broad and of significant magnitude, which shows strength.

In both the S&P 500 and the NYSE overall, we’re seeing steadily increasing numbers of new lows. Also, the numbers of new lows are outpacing the numbers of new highs. The number of new highs had still been significant, albeit decreasing, despite the sustained market decline. Yesterday, there were one-third as many new highs as new lows in the S&P 500 (5 vs. 15). The corresponding figure for the NYSE overall was 41% (26 vs. 63). This suggests a bifurcated market in which some individual equities were still doing well.

However, the number of new lows has been trailing off. Today, there were only two new lows in the S&P 500 (vs. 14 new highs). For the NYSE overall, there were 13 new lows and 55 new highs, which is more than a 1:4 ratio. This suggests that the market has made up its mind as to its direction, and that this direction is down. A strong enough decline negatively impacts even strong individual equities.

The NYSE Advance-Decline line has clearly rolled over. Likewise for the NYSE Up Volume-Down Volume line.

You can actually see the roll-over in the NYSE New Highs-New Lows line now, although it’s still subtle. Additionally, throughout the current bear market rally, this line stayed far below its peak in November 2021. This suggests that we were in a sucker’s rally that was far weaker internally than was suggested by the depth of the retracement in the stock indices. Moreover, it suggests that this sucker’s rally is ending. You don’t get substantial numbers of new lows until you get substantial numbers of individual stocks that have undergone a substantial decline.

$VIX has seen a sustained rise since last month. It has now reached a new high for the advance from its low in mid-June.

The CBOE put:call ratio has continued to increase. It spiked from 0.97 on Monday, August 14 to 1.26 on Wednesday, August 16. That is a huge move in just two days! Furthermore, it was 1.05 on Tuesday, August 15, so most of this move happened on Wednesday. This suggests that many people are purchasing put options as insurance or for speculation. This, in turn, suggests recognition that the present decline may be more significant than previously thought. The put:call ratio dropped to 1.09 today, Thursday, August 17. That is still higher than any day, other than August 16, in the last few months.

According to a survey by the American Association of Individual Investors (AAII), the percentage of bulls is decreasing and the percentage of bears is increasing. The spread between them has narrowed to 5.80%, from a peak of about 30% on July 17.

IWM is an ETF that closely tracks the Russell 2000 index of small cap companies. My Elliott Wave count of IWM is as follows:

• A peak at 198.75 on July 31.
• Then, a clear, impulsive five waves down to 193.06.
• Then, a clear three waves up to 196.31.
• Then, five waves down to 190.52. This is less clear than the preceding move. It relies on the short movements near the end being a fourth and fifth wave. One big clue is the gap down, which tends to appear in the third wave position.
• Then, a clear three waves up to 194.12. This overlaps the preceding wave 1, so it cannot be the fourth wave. Therefore, it is likely wave 2 of 3.
• Then, an impulsive five waves down to 189.74. This is a bit harder to count because of the smaller size of the waves, but I’m confident enough of it. This is likely wave 1 of 3 of 3.
• Then, three waves up to 191.69. This is likely wave 2 of 3 of 3.
• Then, a move down to 188.09. It appears to be a series of five different three wave moves, so it is likely to be a leading diagonal. That would mean it is likely wave 1 of 3 of 3 of 3.
• Then, an advance to 189.25, which is deep enough to retrace the foregoing move. It is therefore likely wave 2 of 3 of 3 of 3.
• We then have a sustained decline that is what you would expect for a third wave at multiple degrees of trend.

When I use terminology such as “likely”, it is a recognition that Elliott Wave counts are rarely absolutely certain. To the contrary, the same chart patterns often suggest two or more different valid wave counts. However, wave counts don’t need to be absolutely certain to be useful. This is especially true in regards to determining whether it is excessively risky to leave an existing position open.

For some reason, the charting solution I use offers charts of IWM but not the Russell 2000 itself. This is unfortunate, because the Russell 2000 is one of the more interesting indices at this juncture. I expect it to be a canary in the coal mine that fails earlier, harder, or both, relative to the major indices. I plan to explain my reasoning in more detail in another article in the near future.

However, I find the correlation between the IWM and the actual Russell 2000 to usually be good enough for most purposes. In case of a close call, it may be wise to check that exact point in the actual index. For example, an apparent slight overlap between wave 1 and wave 4 in the IWM might not exist in the underlying Russell 2000.

My Elliott Wave count of the S&P 500 ($SPX) is as follows:

• A peak at 4607.07 on July 27.
• A leading diagonal down to 4461.33. This must be wave 1, if it is in fact a leading diagonal.
• A clear three waves up to 4527.37. This would be wave 2.
• A move down to 4443.98. This move counts best as a five wave impulse, although there is some uncertainty due to the small size of the moves. Because of its size relative to the previous moves, it is likely wave 1 of 3.
• A clear three waves up to 4489.99. This is probably wave 2 of 3.
• This is followed by a clear, sustained impulsive move down that would be expected for a third wave at multiple degrees of trend.

Note that both wave counts above are not asserting any particular wave degree, as it is too early in the move to make more than an educated guess thereto.

So what’s next? In at least the S&P 500 and the Russell 2000, we are most likely in a third wave decline at multiple degrees of trend. I don’t see a clear sign that this move is over. This move should be followed by a series of fourth and fifth waves to complete the initial impulsive decline from the July peaks.

Thereafter, the entire move from the July peaks should be corrected by being partially retraced. This could be a substantial retracement, of 61.8% or more, which fools people into thinking that the bull market has resumed. But with the amount of downward pressure on the market, the correction could instead retrace only in the neighborhood of 38.2%, or possibly even less.

That said, in Elliott Wave theory, corrections tend to retrace to the level of fourth waves within the move being corrected. But those fourth waves are probably in the future. And they may or may not even make it back to current levels. Thus, even when the present move from the July peaks to a temporary low is fully corrected, this correction may end below current levels.

The only advantage to waiting for this correction is that thereafter, it may be possible to count five clear waves down, followed by three clear waves up. However, achieving this clarity will require accepting significant risk. Make no mistake—keeping long positions open in equities has significant risk at this point in the Elliott Wave structure. As we saw in 2020, declines can begin with minimal warning, and they can be very sharp once they start in earnest.