The biggest “wrecking ball” in the stock market continues to gain strength and traders are trying to avoid the downside aftermath.

The U.S. dollar is at a 20-year high – climbing to $114.13 (U.S. Dollar Index – DXY) at the open session close on Tuesday.

Simpler’s traders are following the dollar closely as the stock market continues its almost daily erratic moves.

US dollar ‘wrecking ball’ hits stock market equities

The DXY – formed in 1974 – measures the rise and fall of the dollar relative to a collection of foreign currencies associated with U.S. trade partners. History has shown that as DXY moves higher, U.S. equities go down.

“The dollar just continues this relentless ascent,” said Henry Gambell, Senior Managing Director of Options Trading at Simpler Trading. “As long as that continues, you should continue to see pressure on stocks.”

Simpler’s traders have watched the dollar spike, but expected – like many traders – to hit resistance on the way higher and provide some respite to the sharp ascent. The dollar has barely paused at key levels on the way up.

“The dollar is starting to get a little bit out of control,” Henry said.

In the market today, the Dow closed at 29,134.99 points to fall .43% (dropping 125.82 points on the day). The Nasdaq was the lone positive, rising to 10,829.50 points for a .25% gain while the S&P 500 was below flat by .21% to 3,647.29 points.

Watching market internal signals for direction

Henry pairs DXY levels with other market internal signals – such as the put/call ratio and the Volatility Index (VIX) – to get a more overall picture of market movement. A sign of concern for equities – stocks – is the DXY heading higher toward $120 and the VIX – “fear” index – rising along with the put/call ratio which is also skewed to the upside.

Henry also watches how the dollar interfaces with foreign currencies such as the British pound, which is losing value against the dollar.

“When I start seeing crazy moves like this in currencies a lot of times they can trickle down into equities,” Henry said.

Add in global earnings of U.S. companies hurting against a strong dollar and U.S. Treasury yields rising to levels not seen in 15 years, and positive prospects for the stock market weaken until DXY starts to fall.

The collection of these stock market signals sends up red flags for traders. All of them converging at the same time creates a “radical” environment for traders to navigate. The key is to stick to a sensible road map based on a predetermined trading plan.

“Tomorrow can bring anything,” Henry said. “The market is in a unique spot, i.e. the currencies mentioned. It’s a market where things have been breaking. Don’t lean heavily on these, but do carry the road maps forward.”

Following market road map forward

Henry sees the path of least resistance – the road map – at this point is to the downside.

He’s watching key technology stocks – such as TSLA, NFLX, and AAPL – which have shown weakness in the volatility and could give way to downside pressure.

As an example, Henry said, “If Tesla and Netflix give up, you’re really starting to see a lot of the spots that were resilient turning back lower.”

On a positive note, these key tech stocks – TSLA, NFLX, and AAPL – were all slightly higher at the close today.

Part of Henry’s road map is focusing on the S&P 500 Index Options (SPX) while shying away from individual stocks, but keeping an eye on these key tickers to see if a clearer picture develops as the market progresses.

He is keeping his trading plan simple, looking for short-term opportunities such as zero days to expiration (0DTE) options plays. These trades are executed on the last day of expiration of an options contract in the SPX. These setups can limit risk because the contract is closed at the end of the day (cash settled) with no overnight exposure and no worry about shares being assigned to the trading account.

As the market volatility continues, Simpler’s traders will continue to reorient their trading road maps.