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.

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.

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.