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.

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.