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.

Since debt issues lie at the very center of the global financial crisis, this news justifiably makes equity traders nervous. 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.