This market runs cold and hot with no clear direction on whether traders’ wish lists will be met with an end of year gift of profitable premiums or lumpy losses.

Stock market movement heading into the final week of October has been anything but steady.

Retail traders must keep in mind the all important strategy of considering all stock market variables before committing capital to the inherent risks of trading.

Two traders from the Simpler Trading team offered differing insights into how they see this market unfolding in the final quarter of 2022.

How stock market closes 2022 is key question

A strong move higher on Friday across the market is a bullish phase that may continue through the end of the year, according to Jack Roberts, Director of Options Strategies and Micro-Futures at Simpler Trading.

Jack has been discussing the arguably unpopular possibility of a bullish run in a bearish market heading into the November midterm elections and through the end of the year.

His targets to watch for support on the E-mini S&P 500 Futures (ES) for Friday were upticks to 3,700 and then 3,720. The ES pushed through these levels on Friday along with the three major indexes finishing a strong bounce for the day.

In the market today, the Dow spiked to 31,082.56  points to jump 2.47% (adding 748.97 points on the day). The Nasdaq soared to 10,859.72 points for a 2.31% increase while the S&P 500 jumped 2.38% to 3,753.14 points.

Jack is following this movement as a 50% upside retracement toward the August high on the ES with a target of 3,838.50.

“The longer we trade sideways, the higher probability of the market firing to the upside to take us back into or at least to retest 3,900 and the daily 100 simple moving average,” Jack pointed out.

He noted that the market has shown how there will be pullbacks and bounces along the way.

“We are well on our way for a repeat (retracement) heading into November and I’m thinking the rally could just be starting up, as there is a fresh new squeeze on the ES daily chart,” Jack said.

Jack expects the ES to cycle up and down over the next few weeks but is upbeat about the structure setting up along the way.

“When everybody’s expecting the doom and gloom, I’d like to be on the opposite side,” Jack said.

Flip side viewpoint sees market headed lower

The flip side to any position in the stock market is simply the opposite direction.

Henry Gambell, Senior Managing Director of Options Trading at Simpler Trading, is of the mindset that this bearish market is setting up for a continuation of that trend.

Sharp bounces, like the 700+ point jump in the Dow today, are countertrend moves to be expected within the overall bearish trend.

“We know that even in bearish trends we will have bounces,” Henry said. “You want to compare the bounce that came prior to the latest bounce.”

When following this cycle, Henry pointed out that bounces should be similar in time frame and price.

This helps define the move as a countertrend bounce in an otherwise bearish market, Henry said, and the daily squeeze could show an accelerated move to the downside with how this market is working.

As for the bullish side of the trading equation, Henry is not liking any charts with a fighting chance for a buy.

Chart patterns that Henry is following show tickers across the board moving toward the 21-day exponential moving average (EMA). This “look back” moving average is consistent with a reversion to the mean.

“It helps you define the direction of the trend,” Henry said. “As long as that moving average is moving, in this case, directly lower the idea would be to participate in a bearish way.”

Henry is keen to watch for tickers where the squeeze is showing how movement to the downside could be accelerated, particularly options contracts with expirations into November or December.

This observation aligns with swing trading possibilities, Henry said, where this type of bearish setup requires some foresight on the trader’s part and a willingness to hold this position through any bounces ahead.

Henry has observed a variety of charts lining up in this bearish pattern, including indices, leading stocks, and cryptocurrency.

“I believe we are getting ready to resolve in the direction of trend as defined by the 21 EMA and with the daily squeeze,” Henry said.

VIX, U.S. dollar could push equities lower

Other market indicators are complementing Henry’s observations.

He pointed out the Volatility Index (VIX) and the U.S. Dollar Currency Index (DXY) which can be helpful in determining direction. When these two factors are added to the directional equation, their strength to the upside indicates weakness in equities. At the close on Friday, the VIX was at 29.99.

“If the squeeze in the VIX is going to fire long, it is going to help drive equities lower,” Henry said. “It all looks very bearish to me.”

Henry has an established watchlist of tickers that he follows regularly for squeeze setups. His watchlist includes currencies, indices, and key equities. He is seeing bearish signals across the board on his watchlist.

The mindset Henry employs daily is that there is no way to know the exact time, or end result, of how any squeeze setups will play out. He understands that anything can happen between now and the target time frame for any trades in play.

“My outlook into November and into the end of year is bearish,” Henry said. “The only thing that would change my mind is a complete about-face in the dollar.”

As a note, the dollar has gained strength throughout 2022, rising to a 20-year high. The dollar settled at $95.96 to end 2021, and was at $111.83 at the close on Friday.

Traders will have to weigh the varying insights and develop a trading strategy to fit their personalized trading plan.