We recently built the Sigma Smart Money Index (SSMI). This index is based on the Sigma Whole Market Index (SWMI) adjusted for the volatility. ( SSMI (t) = log [SWMI(t) / VIX(t)^2], with VIX representing the CBOE Volatility Index).

The idea behind this index is that when the equity market reaches unsustainable levels, smart investors withdraw some money from the market (often with derivatives strategies, put options) and this creates a pickup in volatility. So, the smart money index starts to roll down. At the opposite, when everyone is selling at desperate levels, smart investors start to build positions (often with derivatives strategies, call options)), and the volatility declines. When this occures, the 'new low' printed by the market is unconfirmed by the smart money index because volatility is easing.

For the time being, it is interesting to notice that the 3 recent tops aren't confirmed by the Sigma Smart Money Index. This doesn't mean the market will decline (right now) but this is another warning signal.

Looking at our indicators, the Sigma Trend Index (STI) is close to its zero line (at '2'), telling us the uptrend is currently tested by the market. Other indicators remain neutral at '3'.

There is no change in our trading book:

Short Term Trading Book:

- SPX: 1 short at 1742.85 (stop @ 1783, 3pts above the ST model to take into account bid/ask spread)

- NDX: 1 short at 3361.01 (stop @ 3441, 5pts above the ST model to take into account bid/ask spread)

- CAC: 1 short at 4272.14 (stop @ 4372, 5pts above the ST model to take into account bid/ask spread)

- DAX:  no more position

- EStoxx: 1 short at 3027.17 (stop @ 3108, 5pts above the ST model to take into account bid/ask spread)

Medium Term Trading Book:

- No more medium term position at this stage.

It is unusual to have a session with so low intraday volatility. Current situation is unclear: is it a consolidation before the next up leg or is it a consolidation before a test of the blue horizontal line(and maybe lower)? We need a breakout of recent trading range in order to get more indications about the direction of the next big move.

Our indicators are rather neutral, the Sigma Trend Index is at '4' while other indicators are neutral at '3'.

There is no change in our trading book but we are close to our stop on the SPX:

Short Term Trading Book:

- SPX: 1 short at 1742.85 (stop @ 1783, 3pts above the ST model to take into account bid/ask spread)

- NDX: 1 short at 3361.01 (stop @ 3441, 5pts above the ST model to take into account bid/ask spread)

- CAC: 1 short at 4272.14 (stop @ 4372, 5pts above the ST model to take into account bid/ask spread)

- DAX:  no more position

- EStoxx: 1 short at 3027.17 (stop @ 3108, 5pts above the ST model to take into account bid/ask spread)

Medium Term Trading Book:

- No more medium term position at this stage.

Yesterday we wrote: "...Looking at the chart, recent move looks like an a-b move from an a-b-c (or a 1-2 from a 1-2-3-4-5 move). Patience, the breakout is probably for today, and I would prefer a breakout by the south..."

We can notice the head & shoulders we detected on the Sigma Whole Market Index was confirmed. The breakout is clear and the target (size of the head reported below the neckline) is the blue horizontal line.

In Europe the situation is even more bearish. After a huge run up during the session (just after ECB's surprise rate cut), the market reversed from earlier gain and closed in negative territory. These kind of big reversals (of more than 2%) are highly bearish. Why? Because it means investors and traders knew they were running ahead of fundamentals and at the first signs of decline in the market, everyone is running to the exit => major reversal.

Usually this pattern (up or down) only occurs at major turnaround in the market. In this context, we expect a deep correction in Europe in coming days/weeks.

The Sigma Trend Index declined in negative territory. Once again, the negative divergence we had few sessions ago (between the Sigma Whole Market Index and the Sigma Trend Index) was an early sign of correction.

Looking at our indicators, the Sigma Trend Index declined from '5' to '-4' and the Swing collapsed to '1', telling us yesterday's move was highly impulsive.

Unfortunately, the surge in the Dax reached our stop level and we closed the position. All other positions are still open, and the model computed new stop level for the NDX :

We closed our short position on the DAX @ 9102.17 => 8860.35 - 9102.17 = -241.82 (loss)

Short Term Trading Book:

- SPX: 1 short at 1742.85 (stop @ 1783, 3pts above the ST model to take into account bid/ask spread)

- NDX: 1 short at 3361.01 (stop @ 3445, 5pts above the ST model to take into account bid/ask spread)

- CAC: 1 short at 4272.14 (stop @ 4400, 5pts above the ST model to take into account bid/ask spread)

- DAX:  no more position

- EStoxx: 1 short at 3027.17 (stop @ 3115, 5pts above the ST model to take into account bid/ask spread)

Medium Term Trading Book:

- No more medium term position at this stage.

After a weak open, the market sharply declined in the first minutes of trading. Thereafter, a strong rally started and the market recovered most of its losses and the NDX was able to close in positive territory... When I look at the charts and at  valuations of some stocks (such as TSLA, NFLX, AMZN, LNKD, FB,  ...), I truly believe we are in the same situation than in 2000. How many time this situation can last?

The H&S pattern remains valid for the time being.

There is no change in our indicators at this stage. It is interesting to notice that the number of consecutive up or down sessions is decreasing, showing us the market is trendless.

This situation can also be illustrated looking at the Eurostoxx50. On the chart we can notice that:

- pullbacks took between 13 and 18 days

- each pullback (in points) is smaller than the previous one (=> clear sign that investors are more and more bullish and ready to buy on any dip)

- at the same time, rallies become shorter and shorter in both time and points => clear sign this rally is mature

There is no change in our positions at this stage.

Short Term Trading Book:

- SPX: 1 short at 1742.85 (stop @ 1783, 3pts above the ST model to take into account bid/ask spread)

- NDX: 1 short at 3361.01 (stop @ 3445, 5pts above the ST model to take into account bid/ask spread)

- CAC: 1 short at 4272.14 (stop @ 4400, 5pts above the ST model to take into account bid/ask spread)

- DAX: 1 short at 8860.35 (stop @ 9102, 10pts above ST model to take into account bid/ask spread)

- EStoxx: 1 short at 3027.17 (stop @ 3115, 5pts above the ST model to take into account bid/ask spread)

Medium Term Trading Book:

- No more medium term position at this stage.

When we look at the chat of the Sigma Whole Market Index, it seems the recent up move is completed (5 sub waves to the upside). If our wave count is right, we can expect an acceleration to the downside (now).

There is no change in our indicators, the Sigma trend Index is at '4'. It will be crucial to monitor if it declines in negative territory in coming sessions.

There is no change in our positions at this stage.

Short Term Trading Book:

- SPX: 1 short at 1742.85 (stop @ 1783, 3pts above the ST model to take into account bid/ask spread)

- NDX: 1 short at 3361.01 (stop @ 3445, 5pts above the ST model to take into account bid/ask spread)

- CAC: 1 short at 4272.14 (stop @ 4400, 5pts above the ST model to take into account bid/ask spread)

- DAX: 1 short at 8860.35 (stop @ 9102, 10pts above ST model to take into account bid/ask spread)

- EStoxx: 1 short at 3027.17 (stop @ 3115, 5pts above the ST model to take into account bid/ask spread)

Medium Term Trading Book:

- No more medium term position at this stage.