What traders are watching this afternoon

Trader on the floor of the New York Stock Exchange.
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Trader on the floor of the New York Stock Exchange.

The dollar continues to stand tall, and positive housing data is supporting oversold stocks, while bond yields nudge higher even after a weak five-year Treasury auction.

The dollar's gain is also oil's pain, with the dollar index at a four-year high and Brent crude at a more than two-year low.

The 18 percent jump in August new home sales Wednesday, conflicts with Monday's surprise 1.8 percent slump in existing home sales, so traders view it as a wash. A bigger factor for markets may have come from Europe, where the words of European Central Bank President Mario Draghi continue to resonate, and traders bet the ECB would offer a new stimulus bond purchase program, after lackluster demand for the ECB's new lending facility last week.

The S&P 500 was trading near the day's high in mid-afternoon trading, after the index touched its 50-day moving average and moved higher. The Russell 2000, which led the market lower this week, bounced back with a 0.6 percent gain in afternoon trading. It is still off 2.5 percent for the week.

The dollar index topped 85 Wednesday for the first time since July 1, 2010. Additionally, it continues to be on track for a record eleventh straight weekly gain.

Wednesday afternoon's big events included the Treasury's 1 p.m. EDT five-year auction, which received a tepid resposne. With geopolitics in the background, traders were also focused on events at the UN, where President Barack Obama chairs the U.N. Security Council.

The words of Cleveland Fed President Loretta Mester were also being watched, as she is a newly fledged voting hawk on the FOMC.

Read MoreObama at UN, condemns Russia, calls for action on ISIS

The five-year yield moved higher into the auction, and the $35 billion auction went at a yield of 1.8 percent, the highest since May, 2011. Dealers were awarded 41 percent, versus the average 35 percent in the last four auctions. The bid to cover was the lowest of the year.

Read MoreDud five-year auction blamed on Fed uncertainty

The two-year auction Tuesday went off with a strong showing, at the highest yield in three years.

Read MoreFed's Mester days get rid of 'considerable time' language

Mester said the Fed made substantial progress toward its goals and once more said the Fed should revise its rate guidance. Mester has not dissented at Fed meetings but she has questioned the language in the Fed's statement that it would keep rates low for a "considerable time."

Mester also said she expects GDP growth of 3 percent during the second half of this year, and into next year and 2016. Others at the Fed revised downward their views on economic growth into 2016 in the Fed's most recent economic projections, released last week.

Chicago Fed President Charles Evans also spoke Wednesday afternoon. Evans, a dovish voice on the Fed, said the Fed should be "exceptionally patient" on rates, and said lower inflation due to a strong dollar would imply more accommodative policy.

Read MoreTreasurys edge lower after upbeat home sales data

The dollar continues to gain, making stock traders increasingly nervous but Wells Fargo Securities strategist Gina Martin Adams says the 7 percent rise in the dollar from its March low may not be problematic for stocks and could create more tradable opportunities in stocks.


Read MoreStocks bounce back, Wal-Mart supports blue chip gains

She says, however, watch for earnings volatility in stocks with high overseas sales ratios. Adams also says each 1 percent move in the dollar index has only a 0.1 percent impact to the bottom line annualized S&P 500 EPS. Year to date, the index is up 6 percent so it has had little material impact. Five sectors most correlated to the dollar are energy, materials, staples, health care and industrials.

Adams notes the dollar index has appreciated 5 percent or more in a single quarter only nine times in the past 25 years, and for the third quarter, it's up 6 percent. During those quarters, Adams says, the S&P recorded average operating earnings per share decline was 2 percent from the prior quarter, and in the worst case scenario, if the S&P earnings declined 2 percent, earnings would still show a 5.7 percent year-over-year gain, based on estimates.

Speaking of the energy sector, it is the worst performer of the S&P sectors—down 0.9 percent. Even though oil inventory data showed an unexpected drawdown in supply, oil continues to sag as the dollar gains, with Brent sliding under $96 per barrel, a more than two-year low.

Read MoreBrent slips further to lowest level in more than two years

West Texas Intermediate was trading just slightly higher at $91.71 per barrel, even as U.S. crude stocks fell 4.3 million barrels last week, compared to analysts' expectations for a build of 386,000 barrels.

Rising supply from Libya offset some of the concerns about rising tensions in the Middle East. Libyan output is pegged at 900 million barrels per day, after its largest field restarted Monday. Iraq and Nigeria are also reported to be increasing exports.