This analysis covers the markets as they stand as of the close of US-based trading on Thursday, August 24, 2023. Data are current as of that time. “Today” is relative to that date. This is despite this article being published on Friday, August 25 in the Central, Eastern, or GMT time zones. However, it is being published on August 24 in the Mountain or Pacific time zones. And on Friday, the Mountain time zone (which includes Wyoming) may well be the time zone that matters.

Overall, today was a solid down day. The DJIA, S&P 500, S&P 100, Nasdaq Composite, Nasdaq 100, and Russell 2000 were all down over 1%. This is measured from the opening of trading today. The decline would be even more significant if it were measured from the spike high at the beginning of the trading day. On the NYSE, 76% of stocks were down, as opposed to only 23% that were up.

The $VIX had a similar pattern, but in reverse. It formed a spike low at the beginning of the trading day and closed the day up by over 7%.

The percentage of stocks that are above their 200 day moving average (MA) continues to drop. As of today’s close, it is 50.24% for the NYSE overall and 50.40% for the S&P 500. (As of the close on August 17, these percentages were 51.05% for the NYSE overall and 53.60% for the S&P 500, respectively.) Meanwhile, the S&P 500 closed today at 4376.31, and its 200 day MA closed at 4142.12. Thus, the S&P 500 is only 5.65% above its 200 day MA. Thus, since this time last week, the index is only slightly closer to its 200 day MA. But these percentages have worsened to a greater degree than the underlying index. This is a sign of internal deterioration in the market.

A similar observation applies to the 50 day MA for $SPX. It is at 4458.90, so $SPX is only below its 50 day MA by 1.85%. This margin is almost the same as last time. However, the percentage of individual shares below their 50 day MA deteriorated to 31.20% (vs. 34.40% as of the close on August 17).

Despite the strength of today’s decline, there were still a meaningful number of new highs today. On the NYSE, there were 27 new highs and 46 new lows. On the S&P 500, there were 9 new highs and 12 new lows. In both cases, there were more than half as many new highs as new lows. This is a sign of a market that still hasn’t made up its mind about which way to go.

The NYSE Up Volume-Down Volume line fell to negative 6963.52 today. This is not far above its low of negative 7717.18 on March 17, 2023, its lowest level in two years. Of course, that time period includes the entire move from the all-time peaks in the major indices in November 2021 and January 2022.

Furthermore, it is interesting that the two-year low is at that time, rather than in October 2022, the month when the major indices found a temporary bottom. In that month, $NYUD bottomed at negative 7322.07 on October 14. This suggests that for the last few months, volume has been weaker than is obvious from the underlying index values.

Yesterday, the put:call ratio spiked again, to 1.18. This is a significant jump from 0.91 on Monday, August 21. However, it is still below the 1.26 level from August 16.

A survey from the American Association of Individual Investors (AAII) found that as of August 21, 32.3% of respondents were bullish and 35.9% were bearish. Thus, there are now more bears than bulls, with a margin of 3.6%. This is the first time since May that this survey found there to be more bears than bulls. Could this be a sign that the retail investor is starting to realize there are fundamental problems with the economy and the financial markets?

In the S&P 500, the advance from 4335.31 (early on August 18) to 4458.30 (early today) does not count well as an impulse. It counts well as a double zigzag, which is a corrective move. However, it also counts well as a leading diagonal.

This move is followed by the sharp decline today. So far, this is a clear three waves. We are currently in the third wave, which is not yet as long as the first wave. Until this is countable as a clear five waves, there is a significant risk that this move is one of the following:

• A B wave of a single zigzag, wherein the A wave is a leading diagonal as discussed above.
• An X wave of a complex correction. This move is sharp and swift, relative to the corrective advancing move before it. That is typical of X waves within complex corrective waves.

In either case, this move would be followed by another advancing wave to complete the overall correction.

It is interesting that today’s high of 4458.30 does not overlap the likely first wave ending at 4461.33 (on August 9), as discussed for the report for Thursday, August 17, 2023. Thus, the peak at 4458.30 could potentially end a fourth wave correction of the entire decline from the recovery high at 4607.07 (on July 27).

Another possibility is even darker. The decline from 4527.37 (early on August 10) to 4335.31 counts best as three waves. For it to be five waves, there would need to be an upward corrective wave that is small relative to the upward corrective wave from 4443.98 (early on August 11) to 4489.99 (late on August 14). This is allowed, but it has a lower probability.

However, the advance from 4335.31 to 4458.30 overlaps the decline from 4527.37 to 4443.98. Therefore, this advance cannot be a fourth wave of an impulsive decline from 4527.37. Thus, there is a high risk that this advance is actually a second wave of a decline from 4489.99. If we update the wave count in the $SPX from the report for Thursday, August 17, 2023 based on this possibility, we get:

• Origin of the move: The peak at 4607.07 (early on July 27).
• Wave 1: The leading diagonal down to 4461.33 (on August 9).
• Wave 2: The clear three waves up to 4527.37 (early on August 10).
• Wave 1 of 3: The decline to 4443.98 (early on August 11).
• Wave 2 of 3: The advance to 4489.99 (late on August 14).
• Wave 1 of 3 of 3: The decline to 4335.31 (early on August 18).
• Wave 2 of 3 of 3: The advance to 4458.30 (early today).
• Wave 3 of 3 of 3: The ongoing decline.

As in the report for August 17, this wave count is not asserting any particular wave degree.

The third wave is often the strongest wave of an impulse. This is especially true for waves that are third waves at multiple degrees of trend. Thus, a wave 3 of 3 of 3 is likely to be very strong.

It is interesting that wave 2 of 3 of 3 is larger than wave 2 of 3. It is allowed, but atypical, for the smaller degree wave to move farther than the corresponding larger degree wave. However, this is consistent with the possibility that wave 3 of 3 will be massive, relative to wave 1 of 3. In other words, this is consistent with the possibility of a sharp decline.

Another risk factor is Fed Chairman Powell speaking in Jackson Hole, Wyoming tomorrow morning. This speech is likely to trigger volatility.

However, as noted above, there is also a wave count wherein the next move is a milder decline, and another wave count wherein the next move is actually an advance. Thus, as usual for Elliott Wave analysis, we don’t have exact certainty of the next move. However, we can make an educated guess at which outcomes have a higher probability. We can also consider the potential impacts of each outcome.

It is emphasized that even the darker scenario above is not intended as a crash call on the scale of 1929, 1987, or even 2020. The strength of the third wave at multiple degrees of trend would be relative to the preceding sequence of first and second waves. More generally, it would be stronger than the quiet market over the last several months. But that’s not saying much.

If we look at the big picture in the S&P 500:

• The move from the all-time high at 4818.62 in January 2022, to the recent low at 3491.58 in October 2022, can be counted as wave 1. This move appears to be an expanding diagonal.
• The advance to 4607.07, on July 27, 2023, can be counted as wave 2.
• The subsequent decline is part of wave 3.

In an impulse, the third wave will continue past the end of the first wave. Typically, it does so by quite a bit. Therefore, if this big picture wave count is correct, wave 3 therein is nowhere near its terminus. This increases the probability that the detailed count outlined above is actually occurring as part of wave 1 of 3 of the big picture count. If there is a decline in the near future that is of similar magnitude to the sharp declines in 1929 and 1987, it is more likely to happen as part of wave 3 of 3 of the big picture count.

I’ll say this last, because it is critically important in my opinion. It is important to consider risk versus reward, including the relative probability of each outcome. A primary consideration is avoiding bad outcomes that have a high probability.

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.