After the worst week of the year, the stock market worked its way slightly higher into the last days of the month.

February historically is a rough stretch for traders so the uptick was a welcome session.

How this market continues is very much up in the air and key technical levels must be met if equities are going to gain ground in the weeks ahead.

Trading game plan focuses on 3 market markers

The game plan this week is straightforward for one pro trader.

Sam Shames, Vice President of Options at Simpler Trading, said any meaningful change in the stock market to the upside will require three things to happen at once. His markers are:

• U.S. Dollar Index (DXY)  needs to be below $105
• iShares iBoxx $ High Yield Corporate Bond ETF (HYG) needs to be above 75
• SPDR S&P 500 ETF Trust (SPY) needs to be above 393

“If all of these things occur, then bulls can run and make it a believable rally,” Sam said. “If you can get these three in combination, the market is a long.”

Overall the stock market looked promising to the upside much of the day Monday. Equities ebbed and flowed before closing higher across the board.

In the market today, the Dow closed at 32,889.09 points to rise .22% (adding 72.17 points on the day). The Nasdaq rose to 11,466.98 points for a .63% jump while the S&P 500 added .31% to 3,982.24 points.

Uptick doesn’t change overall bearish signals

The uptick across the indexes today was a welcome session after heavy losses last week. Sam cautioned on getting excited about the uptick and isn’t holding his breath for the above markers to be met.

“The higher probability outcome is that these things will not occur all at once and bears will maintain control,” Sam said. “As it sits now, on any bounces I’m going to be looking to short until the market decidedly tells me that I’m wrong.”

A marker that traders can easily overlook is HYG. Sam considers this as a proxy for measuring risk.

He sees HYG looking significantly more bearish than the SPY. Until HYG starts to firm up, Sam said, its chart signals are showing to the short side.

“This is a pretty overwhelmingly bearish chart,” Sam said.

Adding leverage to his estimation is the dollar which has been trending higher.

“At the moment, bonds and the dollar are both rather loudly flashing red signals to us,” Sam said.

Pro traders take note of key market signals

Other pro traders are seeing the same pressure against equities.

David Starr, Vice President of Quantitative Analysis at Simpler Trading, pointed out that the dollar generally trades inverse to equities and has been timing turns higher or lower with the stock market.

“Looking at support and resistance in the greenback can help us to anticipate when we might see trend changes in the equity markets,” David said.

While the dollar slipped some on Monday – down .51% to $104.67 – the index has been trending higher.

“We can expect that equities will remain under pressure for as long as this bounce in the dollar continues,” David said.

Stock market has economic, Fed hangover

The stock market still hasn’t escaped lingering effects from economic reports and the Federal Reserve (Fed) that impacted stock prices heavily last week.

The loss of upside momentum gained strength with the S&P 500 and Nasdaq falling below key support last week, according to Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. Market losses followed a pullback on reports of strong consumer spending as well as an uptick in inflation. 

“These reports are on the heels of increased job growth in January as well as a smaller than anticipated drop in the Consumer Price Index that was released earlier this month,” Mary Ellen said. “The result has been a shift in the forecast for interest rate hike levels with an increase above 5% now anticipated along with an expectation that they will remain there into next year.”

Rising interest rates won’t help market long term

Mary Ellen pointed out how rising interest rates are not good for stocks and comments from Federal Reserve officials may enliven or dampen the now elevated rate predictions. A possible reprieve for the stock market is the fact that the next Federal Open Market Committee (FOMC) meeting – where new interest rate increases are announced – will not take place until March 22.

“Until then we anticipate market volatility as traders speculate on the next steps from the Fed,” Mary Ellen said. “All is not lost for the markets however, as February has historically been a tough month for the markets.”

There is also positive news in how inflation tends to work in the economy.

“Seasoned market veterans know that inflation does not fall in a straight line,” Mary Ellen said. “It would take a string of higher inflation data for the Federal Reserve to change course.”

With holiday spending and February almost in the rear view mirror, traders can watch stock market internal signals to anticipate what lies ahead.