Making sense of a once dour, now surging stock market is a challenge for retail traders.

Following the release of the U.S. Consumer Price Index (CPI) report early Thursday, the stock market gapped down by more than 500 points in the Dow while the Nasdaq and S&P 500 fell 2.8% and 2.1%, respectively.

The selling frenzy soon fizzled and by mid-morning the indexes erased earlier losses and rallied throughout the day. The Dow jumped by more than 950 points heading into the final hour and all three indexes finished the day strong.

Any traders celebrating early as the market gapped down were not so elated at the close of business.

Stock market rally turns bad CPI report upside down

Stock market action today is an example of bad news being turned upside down in an unexpected twist for traders.

In a down market, according to John Carter, Founder of Simpler Trading, the idea is to “sell the rumor and cover on the news.”

“This is a market where you take it one day at a time,” John said.

Traders fantasizing early in the day about shorting a big gap down watched a nightmare of a rally unfold before their eyes as the open session heated up.

“The market is an equal opportunity dream killer,” John said. “It will help you get destroyed if you’re not paying attention.”

Paying attention to the dollar for market moves

John pointed out what was likely missed by many traders.

“Everyone was positioned for the news,” John noted. Following a negative Producer Price Index (PPI) report on Wednesday, the media consensus was CPI would be a bust.

The CPI report was negative today with inflation increasing or holding at 40-year highs. Core inflation climbed .6% over already high August numbers and spiked to 6.6% year-over-year. Core inflation – closely watched by the Federal Reserve – measures rising costs, less food, energy, and trade services.

CPI numbers showed a .4% increase in consumer staples for September and an 8.2% over the last 12 months. CPI measures consumer expenses for staples such as housing, gasoline, utilities, and food.

Despite the negative report, the U.S. Dollar (DXY) turned the tables on any predictions for market movement.

The dollar gapped higher on the CPI news today, and then pulled back. This was followed by the rapid rally in stocks.

John has previously expressed how DXY is intertwined into all aspects of economies and the stock market. All the stock market needs to fuel a reaction, John explained, is for the dollar to shift from its steady climb over the past few months.

“You can see when the dollar started down today the market started to reverse,” John said, and the fast rally was underway.

The dollar was weaker out of the gate, but the drop started about 10:30 a.m. when DXY was at $113.50 and then fell quickly to $112.44 by noon. A slight uptick was followed by a drop further to $112.16 by mid-afternoon before a steady, but slight rise into a close of $112.36.

Avoid predictions, verify news media market reports

As media pundits clamored early to usher in another day of failing price action, the stock market had a different reaction in mind.

“We think the news is informing us,” John said. “But all it’s trying to do is entertain us to stick around and see the ads.”

John encouraged traders to remove the word “predict” from their trading vocabulary.

“We want to be careful here,” John said.

He focuses on what is actually happening in the stock market throughout the day and identifying trade setups based on actual conditions – not predictions.

Getting caught up in the hype of chasing sharp, big moves leads to problems for traders.

“Focus on preventing bad things from happening,” John said. “The goal is to take a trade and make ‘X’ amount, without losing, no matter what the market conditions are.”

Despite the harsh losses for some today, John believes traders need to experience days like this, especially in an uncertain bear market not seen by most active traders.

“The biggest rallies you’re ever going to see are in a bear market,” John said. “This is a rare day – an exception to the rule. Most of the time, the market is more back-and-forth.”

Stock market still holds opportunities

This type of stock market environment forces traders to exercise, or learn, trading skills.

“There are still opportunities to make our daily net (gain),” John said. “This market is less about the big picture and more like having the skill set to yank cash out.”

The volatile excitement in the stock market today has John anticipating what happens tomorrow.

“It shouldn’t be dull by any stretch,” John said.

One more economic data report this week – the University of Michigan Consumer Sentiment Index – is set for release Friday. The next big news event is the Federal Open Market Committee (FOMC) meeting slated for Nov. 2. The Fed will be digesting all the inflation data released this week.

For now, Simpler’s traders will be following the stock charts on Friday, and keeping an eye on the dollar.