After a sharp morning gap up, U.S. stocks sold off briskly for the first hour of trading. The market consolidated for several hours, then rallied to finish near the highs of the day. However, the consolidation and rally, from 10:30 am ET to the close, lacked volume and conviction. Better-than-expected employment data appeared to provide the fuel for the rally, as last Friday's payroll numbers beat expectations for the first time in four months. The Dow Jones Industrial Average and S&P 500 each closed up 1.3% on the day, while the Nasdaq rose by 1.5%. The S&P Midcap 400 closed the session with a 1.4% gain. The small-cap Russell 2000 led the rest of the indices by posting a slightly better 1.7% advance.

As is typically expected ahead of three-day weekends, the markets rallied on less than impressive volume. Nasdaq volume decreased 1.2%, while NYSE volume was 1.5% lighter than the previous day's level. Advancing volume beat declining volume by 10 to 1 on both the NYSE and Nasdaq. However, the advance was not shared equally across sectors. Utilities, Healthcare and Consumer Staples sectors were laggards, posting modest gains of 0.4%, 0.9% and 0.6% respectively. Overall, it was a bullish move on the day, but the rally began showing short-term signs of exhaustion.

After last week's three-day rally, the S&P 500 SPDR (SPY) may be setting up for a very near-term short selling opportunity. The ETF faces resistance from its 200-day simple moving average, as well as a downtrend line drawn through the April 26 and August 9 highs. Further, volume has been declining since the onset of the rally. A move into the 200-day simple moving average also fills the gap created on August 11. Short-term momentum traders might consider a potential short entry between $111 and $111.40, but we will not make it an "official" play because of the brief time horizon for the play:



The WisdomTree India Earnings Fund (EPI) is poised for a potential breakout. Despite weak volume in the broad market on Friday, EPI saw strong volume. This ETF has been consolidating for the past thirty days, and a break above $24.07 would provide a potential entry signal. Above $24.35, EPI would be poised to rally to its all time highs. Take a look:



Though our bearish position in UltraShort Europe ProShares (EPV) is under pressure from last week's rally, several of our long positions are making nice moves. PowerShares Agriculture (DBA) broke out to close above recent resistance and a fresh high of the year. Our long position in iShares Turkey has also been steadily moving higher since our entry point. Now that the Labor Day holiday has passed, we look forward to more volume coming back into the markets, which may enable the major indices to finally make a decisive move out of their summer trading ranges. A breakout in either direction is better for trend traders than the choppy, indecisive price action that has plagued the market lately.

Today's Watchlist:

There are no new setups in the pre-market today.

Daily Performance Report

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.