For the third day in a row, the S&P 500 fought off early morning weakness and reversed to close near the highs of the day. Wednesday's advance closed above the two-day high, but volume was light. Although the volume pattern during the rally in the S&P has not been ideal, it's hard to argue with the price action when an index is trending higher above a rising 10-day MA.

The NASDAQ Composite cleared the three-day high in the afternoon but failed to hold that level into the close. If the NASDAQ holds above the 10-day MA just below, odds favor the index eventually pushing higher, which would invalidate the current head and shoulders pattern that is still in play on the daily chart below:



In a solid head and shoulders pattern, the right shoulder should stay below the left. Sometimes the right shoulder may push slightly above the left. But when this happens, the price should reverse quickly to the downside and with power, to confirm that the pattern in still in play.

As mentioned above, the Nasdaq may eventually push higher and invalidate the head and shoulders setup....but this is trading and anything can happen.

The energy sector continues to impress, with bullish patterns in energy ETFs $IEO, $XOP, $XLE, $ERX, $OIH, and $IEZ.

SPDR Oil and Gas Exploration ETF ($XOP) recently cleared the downtrend line of the current consolidation and has since pulled back on lighter volume.



The moving averages are all in order, with the 10-day MA above the 20-day EMA. The 20-day EMA is above the 50-day MA and both are trending higher. We look for $XOP to consolidate above the rising 50-day MA before eventually breaking out.

Note that $XOP broke out to new all-time highs in April on the monthly chart after clearing the prior high from 2008.

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.