Going into Monday’s session, much attention will be focused on the Dollar. On Friday, the Dollar index rallied nearly 1.5% on very heavy volume following a much better-than-expected employment report. Looking at the UUP daily chart, we can see increased trading volume since late October, and a potential double bottom.

The EUR/USD currency pair remains in an ascending channel, but if very close to violating the lower trendline.

At DailyFX, John Kicklighter suggests that risk appetite is on the verge of collapse:

The scenario for a market-founded correction isn’t a complicated one. As funds have been invested back into the capital markets at near the same pace that they were withdrawn; the benchmarks have reported record-breaking advances. However, the recapitalizing of the financial system comes with a number of drawbacks. One indisputable fact is that total global wealth has been severely reduced by the 2007-2008 financial crisis and economic recession. A more elemental issue is sentiment as it relates to true fundamentals. Investors have put their capital back into a market that produces very low levels of natural return; and rates of return are not expected to significantly rise in the near future. This means much of the influx to this point has been founded on speculative returns through capital gains. Recovering from the losses of last year, money managers would likely prefer booking some of their profits for the year, rather than hold out through a correction that could ultimately kill the abnormally bullish pace that has been enjoyed to this point. Another concern that is gaining more traction in recent months is the withdrawal of government support. Trillions of dollars worth of guarantees, bail outs and toxic asset purchases have been spent to prevent a financial collapse. Now that it looks like the markets are back on an even keel, the world’s governments will look to reign in this stimulus to work down deficits and further stabilize the private sector. We can already see this take place with the ECB ending its stimulus injections, the Fed testing repos to drain cash and China looking for ways to curb lending. However, this will be an extremely delicate procedure as an exit that is too early can spark another panic; while staying too long can fix to deflation or hyper inflation. It is now a matter of ‘when’ not ‘if’ sentiment will buckle.

Looking at the SPY chart, we can see price has failed to close above the trading range that started in mid-November. It is worth noting that the market has confounded the bears time and again since March. Still, odds will not favor the bulls until we can get a close above the 112.00 area.

Looking at the monthly chart, we can see price approaching resistance in the form of the 200 period moving average.

First thing tomorrow morning I will be checking Dollar activity in Asian and European trading. If we see Dollar strength overnight, expect a rocky session for US equities.

We could simply see the opposite, of course. I’m not ready to commit much to the short side yet, and am still finding some charts that look good for long trades. I am not likely to hold much overnight in this environment, but here are some charts that might make significant moves if the market resumes its rally.

- REXX

- AIXG

- VISN

- CATM

- ECPG

- YONG

- VMED

- DEER

Friday saw some crazy trading, as investors reacted to a surprisingly good employment number. Price gapped up to start the day, proceeded to fall sharply, before gaining traction late in the day to close slightly positive on very heavy volume. The dollar also saw a strong rally, as traders considered the possibility that a stronger economy may result in higher interest rates. Here’s a look at the 2 minute chart of SPY, showing two days of trading:

Monday will be a very important day, as traders take the weekend to consider some confusing crosscurrents. We are also in the midst of the holiday shopping season, one week after Black Friday. Certainly the improving employment situation is good news for retailers. However, it is instructive to look at the charts of retailers who rely heavily on the Christmas season.

First, let’s take a look at the retail and consumer ETFs. RTH gapped higher at the open today, and then actually closed negative on increasing volume. This is a short-term bearish signal, although price is still trading in a rising trend above the 50 day moving average. This is not a place to buy RTH, but nor would I get overly bearish unless it breaches the 89.00 level.

XLY, the consumer discretionary ETF, fared better, closing positive on increased volume. Still, I wouldn’t call the action today particularly bullish as price failed to make a new high despite the positive news, and would wait to see how things move on Monday.

Over at TradeKing, bigdog comments that Black Friday sales were sluggish, and Cyber Monday sales were much better. The charts are supporting this evaluation, as stocks like BBY and AMZN look relatively strong.

- BBY recently broke above a 7 month trading range, and is trending higher.

- AMZN reported blowout numbers for the last quarter. Price appears to be in the process of pulling back after a strong run. I would prefer to see a base form before starting a position in this stock.

Looking at some other retailers, we see a mixed picture. Macy’s is one of my favorite short setups, as I’ve mentioned in a few prior posts. Price recently broke down from a head and shoulders pattern with high volume. This is still a good entry on the short side.

- GPS held up well today, but has been on my watchlist short. A break below 21.12 would indicate lower prices going forward.

- AAPL also reported some great numbers for last quarter. However, two of the last three days have seen selling on heavy volume, with price breaking below the 50 day moving average today. I think this is a great company, but it looks to be going lower from here.

Video games appear to be out of favor with investors. TTWO lowered outlook and received a 29% haircut today.

ATVI also moved lower in sympathy, but the chart wasn’t looking great before today’s news.

- Retailer GME also looks ill.

At any rate, now is a good time to wait and watch. Some select retailers may be good buys going forward, but after today it is prudent to wait for pullbacks.

Stocks sold off late in the day today in advance of tomorrow morning’s employment number. Odds favor the bears going into tomorrow, unless something particularly surprising and positive comes out of the employment report. Looking at the SPY 60 minute chart, we can see that price has failed to close above the trading range of the past few weeks, and today started heading back down.

The longer term look is still essentially bullish, with price trading above the rising 50 day moving average.

Here are some of my current short positions, followed by some others on watch for tomorrow:

- M

- HOT

- MCO

- FDML

- FISV

On watch

- NFX

- JNY

- JPM

- PACW

- WFC

Here are some more long setups for today:

- EPIC

- ECPG

- VISN

- NUAN

- NEU

After a brief flurry of selling late last week, world market appear to be shrugging off events in Dubai. Nonetheless, investors should take time to consider the significance of Dubai World’s debt default. The global economic crisis is, at its roots, a story of overleveraging. While the Dubai debt is not of a scale to cause systemic risk, it should remind us that the world economy is still dangerously overleveraged. Furthermore, new questions arise related to sovereign debt. This morning, Nouriel Roubini sent out a useful summary of the situation:

Last week, state-owned Dubai World requested a six month standstill on its debts, calling into question the emirate’s ability and more importantly willingness to service the debt of its state-owned enterprises. While the debt in question, including a US$3.5 billion bond issued by a property development subsidiary, was not sovereign-guaranteed, investors had treated it as such, relying on the fact that the size of Dubai World and the profile of the underlying projects would imply a government rescue. Uncertainty was heightened by illiquidity and poor price action from the holiday period while the lack of information and communication at the time of the request added to concerns about the complete scale of Dubai’s implicit and explicit obligations—with on and off balance sheet debts by some estimates as high as $200 billion, or over 400% of GDP. Despite capital support that makes an outright default of Dubai World’s debt unlikely, the ongoing restructuring implies that the creditors will take a share of the pain for the most distressed assets in the holding company’s portfolio. The Dubai property development model in particular needs to be reassessed in a lower-leverage world.

At the heart of the saga is a clarification that investors shouldn’t assume implicit government support. Credit ratings for Dubai-owned companies now reflect this lesson, based on a fundamental credit outlook, not an implicit government backstop. Dubai World’s request for a standstill follows months of the emirate reassuring creditors and issuing over US$15 billion in sovereign debt. The debt standstill suggests the emirate had run out of options for a preemptive comprehensive bail-out from the well-resourced region. Apparently, things had to get worse before they got better. Or rather the severity of the situation had to be impressed on bond holders. Although the risk from Dubai is not systemically important on a global level, it is significant on a UAE and GCC level, underscoring the central bank’s response to support domestic financial institutions. Beyond the UAE, the reassessment of government support could draw further attention to other countries where state support is murkier, with obligors pricing in the real likelihood of support.

…Lessons for the global economy and financial markets are mixed. Firstly, the Dubai debacle reminded investors that all is not yet well in the global financial system. Although exposures to Dubai World were relatively diffuse and containable, despite some concentrations in UK and UAE banks, they are a reminder of the remaining losses stemming from the credit boom, some of which have been obscured by the removal of mark-to-market accounting. Finally, the episode underscores the fact that despite a liquidity glut, some countries and companies will find it difficult to access credit. Not all countries have even the prospect of even partial support from a richer neighbor.

In this video, Marc Faber discusses the broader implications of Dubai. Faber has been giving warnings on future sovereign debt defaults for quite some time, and considers the US to be on the road to bankruptcy. Faber discusses the conventional wisdom of the markets, that certain debts have implicit government guarantees, and also that governments can step in to print cash or create stimulus programs as circumstances require. Faber’s conclusion, correct in my view, is that such programs are not really solutions, but rather ways to delay the consequences of overleveraging.

One of the central difficulties in predicting the course of the crisis relates to assessing the amount of bad debt in the system, and who holds it. Moreover, good debt today can always turn into bad debt tomorrow, especially when the default of Entity A results in the failure of Entity B. This was the lesson of the Lehman Brothers failure, which was followed soon afterward by the failure of AIG, which was followed by a massive government bailout. In this and other cases, the government has simply moved the bad debt from Wall Street to the US taxpayer, for payment some time in the future.

Questions remain, however, as to where we stand in this process. The optimistic scenario, the one the markets seem to be embracing, is that we are largely past the crisis point. Although we may have isolated cases of large-scale default, the systemic risk has been resolved, and world governments have the resources to transition us from crisis to sustained economic growth.

The pessimistic scenario holds that the system is still awash in bad debt, companies and governments have simply done a good job of moving to new places and otherwise hiding it for the time being. My opinion is closer to the latter. However, the scenario is likely to play out for quite a few years, and the Dubai default does not appear to be the catalyst for a market crash.

Investors should put the maximum focus on finding companies with strong financial fundamentals, in markets that are most likely to withstand adversity. Companies with significant debt or negative earnings should be avoided. It is noteworthy that many companies in the latter category are up over 1000% since March. As I’ve mentioned, I think the current rally is losing steam, and we are long overdue for a major correction. For long-term investors, this is a place to be highly selective, or to wait for better opportunities at lower price points.

Looking at 60 minute index charts, we can see that the bulls appear to be losing momentum. First, let’s take a look at QQQQ. Price last made a new closing high in mid-November, and has been making lower highs and lower lows since then. A move over 44.40 would at least end that mini-trend, and give the bulls some confidence.

SPY is in reasonably good shape, but has been range-bound since mid-November. Today price made an attempt at new highs, but then started moving lower in the last hour of trading. A move over the November high would trigger buying. However, price is currently near the top of the range, so best to wait and watch for clearer signals.

The small caps continue to be relatively weak. IWM formed a double-top in October, and has a bearish orientation. When we look at the three index charts together, the odds would appear to favor the bears going into Wednesday.

Even so, there are some decent-looking charts to be found. I will be watching SPY particularly closely, along with action in the Dollar. If the bulls can break us up out of SPY’s trading range, here are a few charts I will be watching (also check out Sunday’s post for more setups). I am already long GXDX, NEWN, DRWI, MSPD, CBAK, and NANO, and short M, HTZ, HOT, FDML, and MCO.

- NANO

- MSPD

- GNK

- DRWI

- GXDX

- NEWN

-

-YONG

On the short side, my favorite chart is M, which broke down out of a head and shoulders pattern on Monday, with volume.

An orderly pullback here would set up a lot of charts for the long side, so overall this is a good place to hold a large cash position.

After the gap down on Friday, we saw stocks bounce back during morning trading, and then sideways trading for the remainder of the holiday-shortened session. There are still plenty of traders out there interested in buying dips. Still, Monday will give us a more reliable indication of near-term direction. For now, looking at the SPY chart, price is sitting just above the 50 day moving average, clearly trending higher.

In any case, there are good opportunities on both the long and short side. My current positions include the following:

Long: RINO, NUS, NEWN, GXDX, UIS
Short: M, URE, MCO, HOT, HTZ

Going into Monday’s session, I see some charts that held up well on Friday, and will look for entries if we see bullish action on Monday.

- DRWI

- MSPD

- DSW

- COO

- MDT

- NEU

- NANO

- THM

- NUAN

- JAZZ

On Wednesday, I discussed the action in the Dollar, and mentioned that a weakening USD would lead to a rising stock market. I also posted some monthly charts, suggesting the longer-term technical picture makes this a logical point for a significant pullback. It appears that the Dollar breakdown on Wednesday may have been a false move, as nervous US traders looked to avoid holding the currency over the long holiday weekend. This morning the major news relates to debt problems in Dubai:

Late Wednesday, Dubai World, the city state’s largest corporate entity asked creditors for a six-month stay on repayment of its $60 billion in debts. Asia and Europe markets sold off Thursday on the news, while the U.S. markets were closed for a holiday.

Selling resumed on Friday in Asia, with the Hang Seng Index down 4.4% and the Nikkei down 3.2%, as markets struggled to figure out what kind of exposure banks had to Dubai debt. Heavyweights Standard Chartered Bank and HSBC fell over 7% in Asian trading.

With the equity markets trading inversely to the Dollar, it is worthwhile to watch Dollar movement in order to help predict future action in equities. Looking at the EUR/USD currency pair, we can see that price briefly peaked above the consolidation zone of the past month. However, a move below the 1.47 are would effectively negate the prior breakout, and would signal a period of Dollar strength going forward.

Also note that the Yen has been particularly strong this week, generally an indication that traders are moving away from higher risk assets.

Again, here is a monthly chart for SPY. Note that volume is steadily decreasing, indicating the rally is gradually losing strength.

Given that we have a holiday-shortened day today, Monday will provide a better indication of sentiment. We will also have an extra day of trading in Asia and Europe to evaluate overall conditions. It is too early to get aggressively short, so best bet for now is cash until the technical signals become clearer.

Adding to the bearish case, Mark Hulbert reported earlier this week on treasury bill yields:

Treasury bill yields are now as low as they were one year ago, during the darkest days of the panic and financial meltdown.

In fact, as they did in November 2008, those yields last week briefly dipped into negative territory. That means that, at several points in the last few days, investors were actually willing to give up the right to receive all their money back at maturity — just to receive the federal government’s guarantee that they would at least get most of it back.

And remember: The T-Bill market is not some fringe market. It is one of the largest, and most liquid, in the world.

Mish Shedlock has more on T-Bills here.

As I mentioned, it is a bit early to get aggressively short. However, I have been gradually accumulating short positions during the past few weeks:

- URE, the ultra real estate ETF.

- M

- HTZ

- MCO

- HOT

There’s some representation there from real estate, large retail, rental cars, high end hotels, and a ratings agency. Here are some more that I’m watching. First, I am long-term bearish on casino stocks:

- ISLE

- MGM

Watch bank stocks closely. Most have been trading sideways for quite some time. If these stocks start trending lower, the rally in the broader market is over.

- JPM: head and shoulders forming?

- C: already drifting lower

- WFC

- FITB

Given dollar weakness (see prior post), I’ll be looking for long trades during the remainder of the week. The holiday also creates an environment where traders can push stocks around with less volume, which would tend to favor the bulls.

These first two are stocks that are setting up technically, but I also like them very much on a fundamental basis:

- GXDX provides bone marrow testing, and has great numbers. I have been holding this one for a while in my retirement account. Price is now nearing a point where it may clear a lot of congestions. A convincing move above 39.00 would put it above the trading range of the past two years. I would also consider buying on a pullback to the 35.00.

- NEWN: This profitable Chinese battery producer trades at a P/E near 5, is debt-free, and cash rich. Given that it is an OTC Chinese stock, there is strong potential for price swings. At the same time, it is likely to be uplisted eventually, and will very likely attract more and more attention as demand for batteries increases. Articles here and here discuss the company fundamentals. I am currently long NEWN, and will look to add on a move above 7.00 with volume.

Some of the shippers are showing good potential for short-term trades:

- GNK: I purchased some GNK in the premarket this morning at 25.19. Nice volume pattern and price is sitting on support. Given the volatility, I will keep my stop fairly tight, just below yesterday’s low.

- EXM shows a similar setup with price trading above two key moving averages.

Here are a few more I will be watching. Some I would prefer to see a pullback before entry:

- NUS: I am already long. A very strong stock with great volume.

- NUAN: Watching for a pullback.

- MDT: I would like to see it pullback or consolidate yesterday’s move.

- JAZZ

- DSW

- COO

Overnight the Dollar broke through key support/resistance levels against other major currencies. Given that these levels have been holding throughout the past month, and also given the confirmation across several currency pairs, we should expect further Dollar weakness going forward. The falling Dollar also signals an appetite for higher risk assets, including equities. Therefore we should also expect to see money continuing to flow into the stock market, at least in the short term.

This morning, the Euro moved to new highs against the Dollar, breaking a pattern that started developing in October. This would appear to be an excellent entry long EUR/USD.

The dollar also broke through important support against the Japanese Yen and Swiss Franc. These are fairly clean patterns, and the near-simultaneous break of support/resistance in the three currency pairs should give traders added confidence of a weak dollar in the near term. I am short USD/JPY and USD/CHF.

Forex traders should also be watching the GBP/JPY pair, especially given the Yen’s strength against the Dollar and Euro overnight. As I write this, price is sitting just above key support. I am currently short, and will be adding to the position on a move below 16.24.

Looking toward equities, watch for SPY to break to new highs today, a bullish signal for stocks.

In the longer term, traders are advised to look at the monthly charts of the major indexes. While we are still clearly trending higher, volume is decreasing, and price is approaching the 200 period moving averages. Given the technical signals on the monthly charts, we are approaching an area where we could logically see a major pullback.

I will try to get some individual stock charts up before the market opens.