Stocks followed through on Tuesday's reversal action with impressive gains across the board. All major averages gained at least 1.0%, with the S&P 500 and Dow Industrials leading the way at +1.3%. The rally was broad based, with 217 of the 239 industry groups we follow closing in positive territory.

While on the surface it seems that Wednesday's advance was powerful, there was one very big piece of the puzzle missing and that was volume. Turnover actually decreased by 11% on the NYSE and by 6% on the Nasdaq. The light volume was surprising given the large percentage move and broad participation. The NYSE and Nasdaq volume pattern remains bearish (higher volume down days and lighter volume up days), as we have yet to see a bullish accumulation day in the past few weeks. We'd like to see at least one accumulation day print in a major index before we jump back in to the market on the long side.

Most leading ETFs or stocks are in need of a few weeks of rest after a decent advance and recent increase in volatility. For example, iShares Dow Jones Transportation ETF ($IYT) broke out from a 10-month long base and rallied about 15% before stalling out. Note the pick up in volatility the past two weeks. This is a sign that the price action may need a few weeks of base building. A 4-5 week base above the 50-day MA would be ideal:



First Trust DJ Internet Index Fund ($FDN) failed a recent continuation breakout to highs and has pulled back to the 50-day moving average. Like $IYT, $FDN needs another a few more weeks of sideways consolidation above the rising 50-day MA:



iShares Dow Jones US Oil & Gas Exploration ($IEO) has recently pulled back to the 50-day MA, after a base breakout at $66. On the chart below, note the pick up in volatility on the way down to the 50-day MA. As $IEO digests the recent advance over the next few weeks, the price action should tighten up while setting higher lows within the base:



On the individual stock side, several big cap leaders are holding up: $LNKD, $NFLX, $KORS, $AIG, $GS, $BAC, $JPM, $YHOO, $VLO, $VMED, and $HD are a few. We also keep tabs on what relative strength stocks are breaking down below the 50-day MA, and they are: $FSLR, $SSYS, $VSI, $HSNI, $MHO, $DDD, $RNF, $VMC, $RKUS, $VAC, $DDS, $GNRC,$LCC, $RYL, $REGN, $LEN, and $URBN.

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.