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.

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.