The Russell 2000 closed back above the 200-day MA after several weeks of discussion around $1,100, which is a positive sign. The bullish reversal candle on May 15 held up after two successful tests on May 20 and 21.

The next resistance level is the declining 50-day MA, which may potentially line up with prior swing highs around $1,140.



The Nasdaq Composite closed out the week above the 50-day MA, with the 20-day EMA turning up (bullish sign). The Nasdaq may continue to rally until the 4,225 to 4,250 area, where there is quite a bit of overhead from the basing action in March and a prior swing high in January.



With the Nasdaq back above the 20ema and 50ma, the timing model shifts into buy mode. As mentioned last week, we will continue to trade with reduced size until we have more bullish confirmation from our positions and from other leading stocks breaking out to new highs.

Concerns about the current rally:

1) It is very late stage. The market is being led by the Dow Jones and S&P 500 and not by explosive growth stocks like $FB, $TSLA, and $KORS. However, we could see Nasdaq type issues begin to catch up to the S&P 500 and Dow over the next few weeks.

2) While buyers have stepped in over the past several weeks to hold the S&P 500 above the rising 50-day MA, we have yet to see volume come in on a breakout to new highs.

As for potential ETF setups, Vanguard Information Technology ($VGT) has cleared resistance at $91.50 and is a potential buy on weakness this week (see trade details above).

The 20-day EMA is now above the 50-day MA, and trending higher. The 50-day MA has flattened out and could begin to turn up soon, so the daily chart is building momentum.



Where the moving averages are in relation to each other and the price action helps guide our expectations. For example, if we look back a few weeks ago, $VGT was trading below the 20ema and 50ma. The 20ema was below the 50ma, and the 50ma was sloping lower. The expectations at that point were for the price action to chop around. Anything could have happened, but the odds favored more chop.

With the 20-day EMA now above the 50-day MA and the price action setting higher highs and lows the past two weeks, the odds for a breakout occurring in the next few weeks have increased.

On the stock side, we certainly see strength in some large cap Nasdaq issues such as $MSFT, $QCOM, and $ORCL. These charts are strong, which is why we have a buy limit order in $VGT above, but these are not the type of stocks we buy in our system.



Currently, the market is not being led higher by growth stocks, so we must be patient here and wait for quality buy setups to emerge.

$FB remains a potential buy, but note that it is now a buy stop and not a buy limit order.

Note that we tightened up the stop on half the $LULU position in case the price action breaks out from a tight range on the hourly chart.

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.