One sign of a strong market is when the major averages sell off in the morning session, bottom out through lunch, and rally higher in the final 90 minutes of trading. Yesterday, the S&P 500 and NASDAQ Composite followed this script, fighting off early weakness to close in positive territory and in the top 20% of the day's range. Volume increased on both exchanges, signaling that institutions were actively buying up stock.

In an extended bull market, early morning selloffs put pressure on the weak longs, as they do not have much conviction in the rally (maybe their buy entry was late as a result of this), so at the first sign of weakness they exit a position to avoid taking a full loss. If this process is repeated over and over during a rally, a trader is left with a ton of small losses that add up to one big loss.

Our existing long position in United States Oil Fund ($USO) continues to act well as it is forming a bullish consolidation pattern after a three week rally from the last breakout at $35. The consolidation has held above the downtrend line and the rising 10-week MA, which is exactly what we want to see on the weekly chart below.



On the daily chart, the price action has bounced into a short-term downtrend line, so $USO could just consolidate for a few days at or around its current level before moving higher. We are waiting for a low risk buy entry to add to the position which could develop within the next few days.

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.