During the past two weeks, investors have rallied the stock market following a period of heavy distribution during the preceding two weeks. Judging from trader comments, there seems to be a considerable amount of bullish sentiment, and the sense that we’ll again see new yearly highs very soon. Here is a look at the daily chart for SPY:

While the market may be on its way to new highs once again, several factors signal caution going into the middle of this week’s trading. First, the McClellan Oscillator shows us to be well into overbought territory. Odds favor more consolidation, or a correction phase.

Several emerging market ETFs are also appearing less-than-bullish. FXI, the China ETF, looks particularly vulnerable. Price is sitting below the 50 and 200 day moving averages, with a bearish cross imminent. We have a rounded top pattern, and price failing (so far) to make a new high during 2010. Should the overall market show signs of selling off, I will be looking to short FXI.

For EEM, the emerging markets ETF, price is struggling with the 200 day moving average, although it has support in the 37.00 area. The orientation looks to be sideways or down from here.

For the India ETF, IFN, the yearly high occurred last June. The action is still sideways for now, but appears to be turning lower.

Looking at EWZ, the Brazil ETF, we see price bounced off the 200 day moving average after having dropped from around 78.00 to around 60.00. Price is now hitting the 50 day moving average on decreasing volume. Odds favor a retest of the 200 day moving average.

Equity traders should also consider recent action and news in the currency market. With the US Federal Reserve raising the discount rate, and signaling an end to quantitative easing, the US Dollar looks to continue its intermediate trend higher. The Eurozone faces mounting problems in Greece, Spain, Portugal, and Ireland, which will almost certainly lead to further pressure on the Euro.

From a technical analysis perspective, the Japanese Yen looks ready to strengthen in the intermediate term future. Bear in mind that Dollar and Yen strength can signal lowering risk appetite, which is bearish for stocks. Looking at the EURJPY pair, we can see that Euro has retraced underneath its breakdown level around 127.00, but appears to be losing steam.

- CHFJPY looks essentially the same as EURJPY, and is hitting resistance.

- GBPJPY has not yet broken key support around 138.50, but looks headed in that direction.

I am shorting strength in each of these pairs and scaling into healthy short positions in each case.

There are still quite a good number of bullish setups in stocks (I am currently long CAAS, APL, FNSR, SIRO, and NEWN). In any case, I will be proceeding with caution levels raised.

Early Tuesday morning, European stocks are trading marginally higher, with the US Dollar and Japanese Yen weaker. We could be seeing some recovery in risk appetite, as traders look forward to action in Europe this week on Greece’s debt issues. However, sovereign debt problems are not confined to Greece. Any strength in equities, and weakness in the Dollar and Yen, is likely to be short-lived.

Looking at the chart for SPY, we can see the hammer that formed late in the day on Friday, either due to expectation of European action on Greece over the weekend, or possibly some kind of plunge protection activity. The market failed to follow through on Monday, and remains in a clearly declining trend, with support at the 200 day moving average.

- XLF: The financial ETF is hanging onto the 200 day moving average, and is trading near the bottom of a trading range that goes back to August. A break below Friday’s low would provide a signal to short.

Overall, there appears to be poor risk reward both long and short, considering the market is trading bearish but oversold. Here are a few possible long picks in case we get an oversold rally:

- CPTS

- ISRG

- CAGC

I am likely to steer clear of equities, to focus more attention on the forex market. This morning’s weakness in the Dollar and Yen is moving several pairs into support/resistance areas, setting up potential trades.

- CHF/JPY: Bouncing into resistance.

- AUD/JPY: Ditto.

- GBP/USD: Has broken significant support, and is set up for a short entry here.

- GBP/JPY: In the process of breaking key support.

I think we’re still early in a bearish phase, so here are some short setups to consider.

Prophet charts were having some problems this morning, so using TOS charts this morning.

- FWLT

- LAYN

- AWI

- EJ

- FCX

- DVR

- TCK

- MATW

- GFA

- AVP

In yesterday’s sector overview I commented that several sectors still appeared technically bullish despite last week’s heavy selling. After today, I don’t see anything that looks bullish on the equity side. Later this evening I will be scanning for short setups, and will try to post them before the open tomorrow.

The forex market is confirming the bearish environment for stocks, as money flows into the US Dollar and Japanese Yen. The Dollar and Yen each broke through important support/resistance levels against other major currencies, promising further strength to come. Check out these currency pairs, and the important technical breaches that occurred today (I will be shorting strength in any of these pairs):

- EUR/JPY actually broke major support last week, and had a major confirming move today.

- AUD/JPY broke down decisively through the 200 day moving average today.

- CHF/JPY looks like EUR/JPY, but a week later.

- AUD/USD found some support at the 200 day moving average, but looks set to head lower.

- GBP/USD looks to be in the process of breaking key support.

Looking at equities, it was selling across the board today. Yesterday I noted the bearish setup FXI. The China ETF sold off today on huge volume, promising more downside to come.

- XLI: Yesterday I said this one was holding up well. Today it is on the verge of falling off a cliff. This looks like a good short below today’s low.

- XLF: Still above the 200 day moving average, but for how long?

I am holding short positions in JPM and PFG, and a long position FXP, all from this morning. For the most part I was caught up trading the forex market, and then kitesurfing. Tomorrow I plan to be more prepared for equity trading, so check back for more short picks. For now, here are the JPM and PFG charts.

There has been a tremendous amount of hype surrounding Apple’s release of the new iPad. The media attention comes after another blowout earnings quarter for AAPL. Apple is sitting on a huge amount of cash, consistently beats on earnings, and is probably the most innovative of our large cap technology companies. Personally, I have an iPhone, which is with me wherever I go. I am typing this blog post on a MacBook Pro. I love this computer, and have long been a satisfied Apple customer.

But I’m not bullish on the stock, at least for now. First, the broader market looks sick right here, as we experience another day of brutal selling after some tepid buying earlier in the week. Second, if we look at the AAPL chart, it is looking toppy.

Checking out the AAPL daily chart, we can see that price got a brief boost after the earnings beat in October, but then failed to follow through until price briefly made a new high in December. We saw a flurry of trading activity after the January earnings report, but then price has again sunk back to the support level that goes back to October. Considering this action during the past several months, along with the current distribution taking place in the broader market, odds would seem to favor a break of support in the 187.00, and a test of the 200 day moving average around 175.00.

Investors should carefully watch the consumer reactions to the iPad. Over at TradeKing, bigdog summarizes some of the reviews so far, including $499 price point, and the iPad features. The major complaint I have been hearing, pre-release, is that the iPad is simply a large iPhone, and therefore nothing revolutionary.

I also own a Kindle, which I use on a daily basis. Personally I think the Kindle is a clunky device, but it has the distinct advantage of E Ink (readability), long battery life, and vast quantities of available content. The Kindle is simple and utilitarian, but it gets the job done, particularly for students and travelers. I live in Brazil and travel frequently. The Kindle has given me access to much more reading content than I would otherwise have, and it is portable. My guess is that Amazon will need to cut the price of the Kindle, or somehow significantly upgrade its capabilities, and I’m not sure they have the engineering team to do the latter. If the Kindle gets below $150, we will be talking about very different markets for the two products.

Which brings the question: what exactly is the market for the iPad? What niche does it fill? With the jury still out on these questions, and the chart displaying some very questionable technical action, conditions look bearish for the stock in the immediate future.

Looking further out, Apple is still selling plenty of iPhones, and is continually gaining market share in the personal computer space. Apple is a quality company, and one I would generally recommend for long-term investors. I just think the long-term investor is going to have the opportunity to buy shares at a significantly lower price.

A week of sustained, high-volume selling has now been followed a rather lackluster rebound. Looking at the one year chart, we can see price stalling under the 200 day moving average. A closer look at the 30 minute chart shows us short-term resistance near 110.50.

Looking forward, I am expecting a resumption of bearish action toward the end of the week, and will be favoring short trades. However, looking at an overview of sector charts, the signals are quite mixed. While many sector charts remain technically bullish, this market feels like it is being controlled by the sellers. Such an environment can make for dicey trading.

- IWM: The small caps still have higher highs and higher lows in place. I don’t see a good edge in either direction.

- QQQQ took a big dive last week on very heavy volume, and could be shorted on any break of the short-term (3 days) trendline.

- XLF: The financials have been trading sideways since September. Charts for big banks (GS, BAC, MS, JPM, WFC) are generally bearish.

- KRE: Charts for regional banks look much better. Obama seems to be looking for policies to benefit regional banks at the expense of too-big-to-fail. If the broader market falls, however, the entire financial sector will suffer.

- XLY: Consumer discretionary stocks held up relatively well during last week’s selloff. This chart still looks bullish for now.

- XLI: The industrials remain above key support. This chart also looks bullish.

- XLB: The materials sector saw an extremely high volume of selling last week, but the price of XLB remained above key support. The real opportunity to short this ETF will come if price gets below 28.50.

- SLX: Distribution in the steel sector last week, but price remains above key support.

- – OIH: Oil service have remained in a trading range during the past week.

-IYR held up well last week and remains in a bullish orientation.

- EEM: For now the chart looks okay. A break below the 200 day moving average would be quite bearish for the emerging markets ETF.

- FXI: This is a bearish chart, with distribution last week, followed by a weakening rally, with price stalling below the 200 day moving average. I will be looking to short on a break of the short-term (five days) trendline.

- IFN: The Indian ETF has gone nowhere since last May, with price slowly consolidating. I will be looking to short under the 28.00 area.

- EWZ: A break below 65.00 would be bearish for the Brazil ETF.

After today’s trend day higher, investors may continue to look for bargains through the middle of this week. Certainly the market’s nature has changed during the past two weeks, with many trading days characterized by sustained distribution and an absence of dip buyers.

Today we are getting some news that Senator Dodd wants to water down President Obama’s bank proposals. The President’s newly aggressive stance on banks (which I support) was a catalyst for the current bearish cycle, as investors worried about the impact of trading restrictions and potential loss of liquidity in the equity markets. Considering Wall Street’s influence in Congress, we should see some pushback, which in turn could instigate an oversold bounce.

All the same, I will consider any bounce to be a dead cat, until I see indications to the contrary. Meanwhile, a number of stocks have held up through the recent carnage. I will be focusing some attention on stocks with high short interest, considering that squeezed shorts will provide much of the fuel for the next rally.

- IMAX

- REXX

- CAGC: I will be looking for a clear break of the downtrend.

- CAAS: Today’s low provides a good place for a stop loss.

- COCO: We are seeing some accumulation coming off this base near the lows. High short interest.

- VLO looks ready to break out.

The forex market is serving up some interesting charts, with several currency pairs trading near key technical levels. Here are three pairs I am watching most closely:

- EUR/JPY: JPY has been strengthening against most major currency, with the exception of the Dollar. The Euro, on the other hand, is under pressure as the EMU struggles with debt issues in Greece and potential problems elsewhere. From April 2009 until last month, EUR/JPY bounced several times off of the 127.00, creating a clear support/resistance level. EUR/JPY made a clear break below that line during the last week, and looks likely to test the 122.50 area.

- CHF/JPY: A very similar pattern to EUR/JPY, but the pair is trading above support.

- AUD/USD is trading sideways, and close to breaking support near .8727. The RBA just announced that there will be no rate change (a .25 raise was expected), and AUD sold off in reaction. A breach of support appears likely.

Bear in mind that an oversold rally in the stock market could reverse short-term forex trends, at least temporarily. Specifically, with rallying stock market, traders will be more likely to sell USD and JPY. Given the overall technical picture, I would expect any such reversals to be short-lived.

Many long-term investors, particularly value investors, are attracted to the income provided by stocks that pay healthy dividends. The major stock indexes have seen a remarkable run since last March, creating the strong possibility that the market is overvalued. Moreover, the weak global economy is cutting into profits, often resulting in smaller dividend payments. In this environment, value investors need to be highly selective in the search for companies that stand to maintain dividends, and see share price increase into the future.

Investors may want to take a look at the utilities sector for yield and good potential for increased share price. Roger S. Conrad points out that utilities are benefiting from low interest rates.

In fact, utilities today are borrowing at some of the lowest interest rates seen in more than a generation. That’s the result of still-low benchmark rates, coupled with a dramatic shrinkage of yield spreads investors require between bonds issued by utilities of all stripes and Treasuries. And companies are taking full advantage to deleverage their balance sheets, stretch out maturities, cut interest expense and even lay the ground work for financing needed infrastructure.

Utilities sailed through the recession in part because they provide essential services, demand for which is rarely affected much by recessions. Equally important, however, is the massive reduction of debt and operating risk since the fall of Enron in 2001 nearly brought the entire industry to its knees.

Alan Brockstein says that utility companies should continue to have good access to capital, and highlights ten companies with high yields, low debt, and a history of raising dividends.

The Big Dividend Stock List is a good resource for finding dividend stocks. In addition to the list, the site also has some tips on dividend capture strategies for short-term traders. Also, I have recently been visiting Yieldpig, which features specific high-dividend stocks along with some useful fundamental analysis.

Whether one is investing for the long term, or trading on a shorter time horizon, it pays to buy stocks when they are giving technical buy signals. I did a survey of high yield stocks, and came up with a short list I like right now.

- Babcock and Brown Air (FLY): Yieldpig reports, “FLY trades at .6 times book value. Sell the planes, the buildings, the desks, and the filing cabinets, and the company is estimated to be worth $15 a share.” I like the solid rising trend, and the high volume breakout to start the year.

- Caterpillar Inc. (CAT) offers a decent (2.79%) dividend, but what I like most is the breakout last week. This is an example of a stock that cold have been bought just before the ex-dividend date (1/15) as a short-term trade, considering the strength of the technical setup.

- AT&T (T): I’m going to agree with Cramer, who says “AT&T is a big, safe telco with great exposure to the mass adoption of smartphones” and mobile internet. It also pays a 6.1% dividend. Price looks oversold here, and likely to find support at the 200 day moving average. I would look for price to break out of the downtrend before buying.

- Great Northern Iron Ore Properties (GNI): For the long-term, I like commodities and energy. GNI sports an 11% dividend, and is showing signs of an impending breakout. I would be a buyer on a move over 95.50 with volume.

- Suburban Propane Partners (SPH): The chart below is the 10 year monthly chart. SPH pays a 6.79% dividend on top of that solid long-term price action.

As fears of sovereign debt problems mount following the Dubai World default and the downgrade of Greece’s credit rating, the Dollar looks to be in the process of a trend change. Looking at the US Dollar ETF, we can see plenty of volume coming in as price breaks up and above a six month trendline.

Looking at the EUR/USD, we can see a similar trend break. While the chart argues for further downside over the longer term, it is short-term oversold and sitting just above the 200 day moving average.

During this period of Dollar strength and debt worries, equities have been remarkably resilient overall. SPY remains above a rising 50 day moving average, and near its yearly high.

At DailyFX, John Kicklighter comments that risk appetite has yet to break despite the Dollar’s rally.

All that is needed to tip risk trends into a tailspin is a definitive catalyst. We have plenty of potential threats to global, financial stability; but optimism or greed for greater returns has helped the markets weather most of tremors. This likely means that we need a market-based event. A particularly large withdrawal of capital from the speculative arena or the seizure of a critical node in the broader financial market could certainly spark a panic that leads to a cascade selling event. Ironically enough, the best opportunity to force the Dow below 10,250 or pitch the carry interest into a bleak bear trend is during the low liquidity-period that is approaching. While there is not enough market depth to maintain and develop a reversal; the low liquidity means it will be easier to unbalance sentiment. Therefore, we need only keep a vigilance on the already incubating fundamental troubles that have developed over the past few months and be ready for a new shock to catalyze price action itself. Among the key trends to watch, the threat of defaults on a corporate and national level is particularly troublesome. Not long ago, the IMF warned that the world’s banks have only accounted for half of the losses they will ultimately suffer from following the worst financial crisis since the Great Depression. Now, we are seeing downgrades on sovereign credit ratings that is further taxing an already fragile market that is now seeing some of its ‘safe’ assets degrading. Investors could weather this if the government maintained its support of the global economy and markets; but this safety net is already being rolled in. As stimulus and emergency aid is rolled back, the markets will increasingly have to support its own weight. And, considering how high valuations have run and the lack of true fundamentals to support recent heights; the outlook is fragile indeed.

Aside from the Dollar, financial stocks are also signaling that risk trends may be changing. The past three days has seen Citigroup (C) break down on heavy volume.

Europe’s troubles are weighing on the continent’s banks.

- Lloyd’s Banking Group (LYG)

- Barclays

- Credit Suisse (CS)

And some more US banks with bearish charts:

- Zions Bancorporation (ZION)

- State Street Corp. (STT)

- Principal Financial Group (PFG)

Given high equity valuations and the likelihood of additional crisis events in the debt markets, odds would favor a bearish orientation for stocks.

Last night I discussed the possibility of a Dollar bottom, and implications for the equity markets. This morning the EUR/USD is breaking a major trendline. In early trading, European stocks are lower, as is gold. Here is the EUR/USD chart:

The 200 day moving average seems like a logical target for now. I had an alert which woke me up this morning, and I entered a short position, which I plan to hold for a swing trade.

The AUD/USD currency pair also looks like it may have topped. I entered a smaller short position in this one:

Given the Dollar action, the odds are not good for being long equities here. I posted some charts last night, but doubt I will be touching any of them today.

Over at Zero Hedge, John Bougearel discusses last week’s employment report, and its impact on gold, currencies, and the carry trade:

A client emailed me back to say “I thought the Fed already has stated that it plans to keep interest rates low throughout 2010.”

Yes, I replied, that is the Fed’s basic monetary policy for the next 12 months. And most market participants believe that is a credible statement. So, why should market participants in gold and currency carry trades have been nervous at all? Simply because the economic data pointing to the jobs market stabilizing may not entirely support all of the Fed’s economic policies. It’s not just Fed’s monetary policy that is accommodative. It’s also that trillion dollars of excess liquidity that they have injected into the insolvent big banks. On that score, the Fed has been much more stringent. They promise us that they have the tools to remove the excess liquidity through “reverse repos” and possibly by issuing their own debt, if push come to shove. Moreover, they are telling market participants that they will remove that excess liquidity when the day comes to remove that liquidity becomes self-evident. The idea is a strong recovery will require a shift in Fed policy to remove that excess liquidity sooner than later. And just last week, the Fed was “testing” its ability to do reverse repos with primary dealers. This is an indication that they might be inclined to suck some of that liquidity out of the big banks.

So, the huge selloff might have been sparked by big banks worrying that their might be a little less liquidity to play with in the not too distant future. Now here is where we must judge and question the Fed’s credibility and resolve to remove the excess liquidity on the balance sheets of the big banks. Because the Fed has also reassured us that they would provide as much liquidity to the zombie banks as required to keep them zombified. The stabilization of the jobs report drives a wedge between the two Fed promises to provide as much liquidity to the big banks as required, but also to remove that liquidity quickly and efficiently when conditions warrant.

In short, a stabilization in the jobs market does nothing to improve the balance sheets of zombie banks. An improvement in the big bank balance sheets is the prerequisite which would allow the Fed to mop up the excess liquidity, not am improvement in the jobs market. So, in short, the Gold market has probably overreacted a bit, and may continue to trade lower into the next jobs report. When market participants are reassured that the Fed is in a box and that the excess liquidity must stay in the system for the foreseeable future, gold prices will resume its trend higher and currency carry trades will be put back on.