In this article:

• Stocks dependent on price of U.S. dollar
• Fed’s Powell set to speak again tomorrow
• Watch any price reversion to the mean

“Everything looks ugly, what do we do?”

This question surfaces regularly in the Simpler Trading online chat rooms.

Retail traders, “big players” in the market, everyday consumers, and all variants of analysts are looking for opportunity in the seemingly never-ending chaos of the economy and the stock market.

Simpler’s traders are watching a key economic indicator for how to play this market in the near term.

Traders follow U.S. dollar closely

All eyes at Simpler Trading are keeping an eye on the U.S. Dollar Index (DXY).

The dollar has grown stronger, and the DXY has continued a trend higher.

History indicates that as DXY moves higher the markets go down. The markets tend to not return higher until DXY starts to fall.

“This is the most important thing to watch right now,” said John Carter, Founder of Simpler Trading. “A strong dollar ruins everything.”

John is referring to the effect of the dollar on the stock market and trading in general.

He credits an explosion in DXY price as the cause of much of the uncertainty across markets.

“One thing to remember about the dollar is that pretty much every financial instrument on planet earth is kind of a derivative of the dollar,” John said. “Every currency is absolutely a derivative of the dollar. It’s not the Euro, it’s the Euro as it relates to the dollar, etc.”

This leads to why retail traders keep an eye on the dollar.

“When the dollar is moving higher, you do see stocks moving lower,” John said. “You do see a lot of commodities under pressure. You do see global earnings of U.S. companies hurt with a stronger dollar. You do see debt from emerging economies get more expensive.

“It’s a wrecking ball,” John said. “As long as it’s going higher it’s going to be hard for stocks to rally. For stocks to rally we need for the dollar to ease up a bit here.”

John commented on the importance of the dollar prior to the Wednesday stock market session.

The dollar opened the cash session at $110.32 and closed down at $109.56.

By contrast, the stock market was up across the board.

In the market today, the Dow closed at 31,581.28 points to gain 1.4% (adding 435.98 points on the day). The Nasdaq spiked to 11,791.90 points for a 2.14% jump while the S&P 500 moved higher by 1.83% to 3,979.87 points.

The uptick ended a seven-day losing streak in the Nasdaq and pushed the S&P 500 above the 3,900 psychological level, ever so close to the 4,000 target.

For the stock market to have a solid chance of continuing this rally higher, DXY has to keep sliding.

John noted that the market “fear” is DXY pushing even higher to $113 or $115. This push has accelerated recently as some traders didn’t look for these levels until next year.

John anticipates that if DXY is at $115 by the end of this week, the stock market is facing a serious downturn. The opposite possibility is that if DXY ebbs back and forth off that target, the stock market could rally.

Fed’s Powell may add to volatility

Federal monetary plans may make the stock market worse after tomorrow morning.

Federal Reserve (Fed) Chairman Jerome Powell is set to give a speech before the stock market opens on Thursday.

His speech will follow remarks today when Fed Vice Chair Lael Brainard reemphasized the Fed commitment to stay the course in its efforts to stop inflation. The Fed previously announced a 75 basis points benchmark interest rate hike at the end of September.

These remarks follow a speech last week by fellow Federal Open Market Committee (FOMC) member Cleveland Federal Reserve President Loretta J. Mester who said the Fed has much work to do indefinitely to fight high inflation.

The market open on Thursday could be volatile if Powell doesn’t offer more dovish remarks on combating inflation.

Traders must watch reversion to mean

No matter what the Fed says tomorrow, trading is tricky right now.

John pointed out that anytime price – stock or index – is farther away from its average true range (ATR) that buying or shorting at this level is risky. The risk is higher because the opposite side of any trade is wide open – the trade could go heavily against the price position.

“As we all should know, markets always revert back to the mean,” John said. For example, a price at three times higher than the ATR will revert to the mean price.

“The next reversion to the mean always happens… we just don’t know when,” John said.

In current market conditions, this could push price much higher.

John cautioned that in his technical analysis of internal signals he is seeing a rally ahead into mid-October (with some ugly days first) and then a selloff into the end of the year.

“Right now everything is bearish,” he said.

What to watch in near term

John is closely eyeing the Financial Select Sector SPDR Fund (XLF) as a sign of some positive movement in the market.

“Financials are really important,” John said. “If financials are holding up, it’s hard for the market to crater.”

John is also watching stocks showing promise over the long term, like Enphase Energy, Inc. (ENPH). He pointed to chart analysis showing squeezes over time.

“There are not a lot of stocks out there right now that fit this bill,” John said.

He cautioned retail traders to consider embracing short-term trades.

“This is a market where it pays to be careful,” John said.

Looking for a trading mentor in a wild market?

If you are looking for a trading mentor who has “been there, done that” then consider getting to know John Carter, Founder of Simpler Trading, as he delivers his unique style of trading and strategy with a focus on consistent income results.

John developed the system that brings active retail traders together on a daily basis because he wanted to share his growing pains and successes over the past two decades.
Gain access to John’s live-trading sessions, real-time stock alerts, and learning how a professional trader works in this uncertain market. Get started today.