Led by the strength in the NASDAQ Composite, stocks rallied higher across the board on a pick up in volume yesterday. The strong turnover produced "accumulation days" in the NASDAQ Composite and S&P 500, which was a good sign after a few days of selling action on higher volume.

Yesterday's rally put both the S&P 500 and NASDAQ back above their rising 10-day moving averages. But the next question is do we break out to new highs or stall at the prior high and consolidate a bit more? The daily chart of the NASDAQ below shows typical pullback action:



The PowerShares Dynamic Food & Beverage ETF ($PBJ) has formed a bullish consolidation just below its all-time high during the past five months. The 40-week moving average remains in a clear uptrend, and the 10-week MA has been trending higher as well throughout much of the base:



Notice how the price action has tightened up over the past few weeks, just above the 10-week moving average and high of the consolidation. This contraction in volatility is what we look for in a base, as it often leads to a solid breakout.

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.