In the March 25 issue of The Wagner Daily, we illustrated how PowerShares QQQ Trust ($QQQ) was forming the right shoulder of a bearish head and shoulders formation on its weekly chart. Although that head and shoulders pattern is technically still intact, $QQQ is now trading at the highs of its recent trading range. If $QQQ moves any higher in the coming days, it will break out above the highs of its recent range. If that happens, the right shoulder will become higher than the left shoulder, and there will be increased odds of the head and shoulders pattern transforming into a failed head and shoulders. Below is an updated daily chart of $QQQ:



Since $QQQ never traded below our trigger price for short selling entry (below convergence of the 50-day moving average and March 19 low), a breakout above the highs of the March trading range would have no negative effect on us. On the contrary, failed head and shoulders patterns are actually bullish, because the bears who were betting on lower prices are forced to cover their short positions when the pattern does not follow through to the downside. This is just another example of why our entire trading methodology is based on reacting to price action, rather than predicting it (trading what we see, not what we think).

Recall that we took on additional long exposure last Thursday when Market Vectors Semiconductor ETF ($SMH) triggered for buy entry (initial "starter position"). In our March 28 commentary, we showed you that $SMH was forming a bullish reversal above its nine-year downtrend line. As such, we will be closely monitoring the semiconductor sector this week, as we anticipate bullish follow-through and additional upside gains if institutional funds continue rotating into the semiconductor arena.

Another technology-related ETF we recently discussed is First Trust DJ Internet Index ETF ($FDN). The daily chart pattern of $FDN shown below:



Since its major breakout in January of this year, the late March correction was the first time $FDN pulled back to intermediate-term support of its 50-day moving average since breaking out. Notice how the pullback to the 50-day MA was orderly, and the price has been trading in a tight, sideways range for more than a week.

In the last trading session, $FDN edged just above its 20-day exponential moving average and closed a few pennies above the high of its consolidation that followed the pullback. Because the first pullback to the 50-day moving average that follows a significant breakout creates an ideal, low-risk buying opportunity, $FDN is now poised to move higher in the coming week.

$FDN was added to our "official" watchlist as a potential buy entry last week, and it remains there going into today. Regular subscribers of The Wagner Daily swing trader newsletter should note our exact buy trigger, stop, and target prices for this setup on the "watchlist" section of today's report.

As mentioned late last week, institutions have begun rotating funds into the NASDAQ, which is finally starting to show early signs of relative strength amongst the major indices. If that market trend continues, we should see more clear leadership in both $SMH and $FDN this week.

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.