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A shift in sentiment could be underway for stocks

Traders are watching to see whether sentiment is about to shift for the market's two pain centers—the Nasdaq and Russell 2000.

Read MoreAs S&P 500 tests new highs, is the uptrend at risk?

Both indices, at the heart of the market's recent selling, found their footing late last week and built on it Monday, outperforming the Dow and S&P 500. The small cap Russell gained 1 percent to 1,114, while the Nasdaq gained 0.9 percent to 4,125.

Both indices have been pressured for weeks by selling in small cap, tech, social media, biotech and other momentum names, while the Dow and S&P hit new highs. Even if selling slows, analysts widely expect small caps to continue to lag.

"It's one of those times where volume was light and shorts are covering," said one trader. NYSE volume Monday totaled 2.64 billion shares, well below the average 3.48 billion.

The Treasury market, a source of anxiety last week, also calmed down Monday, with selling in longer duration Treasurys accelerating into the end of the day. The 10-year note yield was at 2.54 percent in late trading, well above its intraday low of 2.492 percent.

Read MoreWhy you need to watch the 10-year this week

The S&P and Dow, meanwhile were up 0.4 percent and 0.1 percent respectively.

"I was short on Friday and I covered today. I got a little more heavy in tech," said Scott Redler, who follows short-term market technicals at T3Live.com. "For the first time in a while, tech was able to be bought on strength rather than just off the lows."

Apple and Google were both higher, with Apple closing above the psychological $600 level.

Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

"I don't think the story is over yet," said Paul LaRosa, chief market technician at Maxim Group. "The volatility continues…The smaller cap indices are trying to show a bottom."

He said 4,177 is resistance for the Nasdaq, and 1,140 is resistance for the Russell.

Redler said the negative head and shoulders top that looked to be forming in the Nasdaq chart is less apparent as the Nasdaq traders higher. "It's a better sign for traders, but I don't think guys are going all in," he said.

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The worst performers in the S&P Monday were all defensive sectors, led by utilities. The sector was off 1.5 percent, while tech was the best performerup 0.8 percent.

In the Treasury market, Traders said the positive action in stocks weighed on Treasury prices. But the debate continued over whether Treasury yields are responding to a weakening economy or something else.

The consensus view is that investors were short Treasurys at the beginning of the year, betting big that rates would rise. But when rates fell instead, shorts were forced to cover and investors had to reposition, driving yields lower.

"I think many are quickly dismissing the move in Treasurys as a kind of a technical factor, nothing fundamental. On one hand that does seem right. On the other hand, it concerns me that we're explaining away too much," said Greg Peters, senior portfolio manager at Prudential Fixed Income.

Read More2.5% Treasury yields make me angry: Yoshikami

Peters said the corporate profit guidance has not been that positive, and the Fed is paring back bond buying as the European Central Bank appears set to make a policy move. "You have China slowing. You have inflationary and disinflationary forces asserting themselves," he said.

Philadelphia Fed President Charles Plosser speaks at 12:30 p.m. EST on the economic outlook, and New York Fed President William Dudley speaks at 1 p.m. on the outlook at a luncheon in New York.

—By CNBC's Patti Domm.

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Featured

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.