Euro zone leaders came up with another proposal aimed at enforcing a type of budget discipline, and the markets liked what they heard Monday. Europe’s Stoxx 600 rose 3.8%, and in the U.S., the Dow Jones Industrial Average rose 2.59%, the S&P 500 was up 2.92%, and the Nasdaq gained 3.52%.

It was the biggest gain in a month and took back a major part of last week’s 4.8% loss on the Dow. But volume was low, with just 958 million shares trading on the NYSE and 747 million on the Nasdaq. Advancers exceeded decliners on both exchanges by 5-to-1.

Even though the stochastic of the S&P 500 is flashing a “buy” signal, don’t be drawn in by this product of volatility. Yesterday’s performance, as impressive as it might seem, technically is nothing more than a “dead-cat bounce” until proven otherwise. And it would take a convincing high-volume advance, closing above the resistance line at 1,220, to change the trend to neutral. All trends are down with the next support at 1,120 to 1,140.

The Nasdaq’s breakdown is even more dramatic than that of the S&P 500. Note the gap that opened as the index plummeted through its 50-day moving average and the support line at 2,600. Yesterday’s low-volume response was much like the 500’s — merely a “dead-cat bounce.” And the “buy” signal from the stochastic, like the 500’s, is merely a reaction following such a deep penetration through a major support area. Despite that, the index could try to close the gap opened last week at 2,567 to 2,540, but anywhere within that space could provide an excellent shorting opportunity.

Conclusion: Yesterday’s rally was to be expected, but unless it picks up, buyers should consider it nothing more than a reactive rally within a sharp decline. Sell into this rally and take defensive action since the path of least resistance is down. Or traders can play the market through options.