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.

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