US Dollar Index will suggest the next market direction today

Wall Street fall for the fourth day in a row

US stocks closed negative yesterday, following a negative trend that is lasting for the past 4 days.

The main reason why the markets are falling is that investors are worried that the Federal Reserve will continue to hike the interest rates in order to reduce inflation.

Strong economic data have shown that there is still work to do for the Fed and its monetary policy implemented so far is not as effective as it should be.

That means that Fed could continue to hike interest rates for a longer period in 2023 with the risk of causing a recession.

S&P 500 Technical Analysis - Daily Chart

 
The S&P 500 price broke below the 21-day MA (blue moving average) and it's currently testing the horizontal support line at around 3900.

In the past few days, the index price has also been rejected at the bear market trendline (see red circles on the chart) and the price fell below the 200-day MA (green moving average).

Those are bearish signals.

If the price is able to hold the support at around 3900, we could see the price increase and retest again the bear market trendline, otherwise, prices could drop to the next support level at the 50-day MA (red moving average) at around 3837.

The only option to change the current scenario to a new bullish trend would be for the price to move back above the 200-day MA and then the trendline at around 4100.

The RSI keeps moving lower to 48, indicating a neutral/bearish trend.

US Dollar Index Technical Analysis - Daily Chart

 
The US Dollar Index measured the value of the US dollar relative to a basket of the top 6 currencies.

Usually, the US Dollar and the S&P 500 move in opposite directions.

Stocks in the S&P 500, like many other assets, are priced in USD.

When the USD is increasing in value, it takes fewer US dollars to buy assets priced in US dollars, so the prices of those assets tend to fall.

For this reason, it is important for US stock investors to monitor the value of this index.

Recently, the U.S. Dollar Index has broken below another key support level, its 200-day MA (green moving average).

This is a bearish signal for the dollar, but it's a bullish signal for stocks.

If the Dollar Index will get rejected and will remain below the 200-day MA, it could support a rally in the S&P 500 Index for some time.

However, both the S&P 500 and the Dollar Index is trading below their key level right now, which is unusual, so the next direction of the dollar will be a leading indicator for US stocks.

Today's price action should provide the answer.

Sentiment Indicator - Fear & Greed Index

The market sentiment is at 59  in the "Greed" mode which is lower than the level registered one week ago.

FedWatch Tool - FED rates probabilities

77.0% of investors are expecting the FED to increase the interest rates by 0.50% in the next meeting.

The remaining 23.0% are expecting a 0.75% rate increase.

The data show us that the number of investors expecting an increase of 0.75% is getting a little bit higher than in the previous days.

The next FED meeting is approaching next week, on 14 December 2022.