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Despite Friday's modest bounce, last week's price action was clearly an unexpected blow to the market. There's still a smidgen of a chance stocks could recover without doling out the normal-sized bull market correction (a completely temporary event, by the way), but it's going to have to do a lot of work - and soon - to do that. If it doesn't rebuild quickly, things could get much worse real quick.

We'll talk about the upside and downside in a second. First, let's run down the major economic data for last week and what's in the lineup for this week.

Economic Calendar

Though the quantity of economic items we worked our way through last week was average, little of it was hard-hitting (other than the market reaction to proposed Fed tapering). In fact, there were only three reports worth exploring. In particular order:

* Inflation 'improved' slightly last month. While any inflation is generally viewed as something undesirable, truth be told, some inflation is healthy. Not enough inflation (which is where we've been for a few months now) is actually a sign of weakness. So, last month's rise from an annualized inflation rate of 1.06% to 1.36% offered a glimmer of hope. Let's not get too excited just yet, however. That's still well below the ideal range of somewhere between 2.0% and 3.0%.

* Housing starts and building permits are still broadly rising, even if the pace of growth is slowing a little. Starts ramped up from a pace of 856,000 in April to 914,000 in May, while permits fell from 1,005,000 to 974,000. Both numbers are still in bigger uptrends, but the red-hot growth pace is mellowing out now. [The bigger picture is still solid for homebuilders though.] On that note…

* Existing home sales reached a multi-year high rate last month. The National Board of Realtors reported that in May, existing home sales hit an annualized pace of 5.18 million units. The fact that it's at multi-years highs speaks for itself.

Everything else is on the table below.

Economic Calendar

This week will be a little busier, though not with a whole lot more important economic announcements. Here are the big ones to watch for, in order of appearance:

* Tuesday: We'll hear last month's Conference Board's consumer confidence score for June on Tuesday. If you'll recall, a couple of weeks ago it was a dip in the Michigan Sentiment Index (1st reading) that rattled markets. If the Conference Boards underscores that dip with another lower reading - as is expected - that could really cause problems. We'll get the final Michigan Sentiment reading for June on Friday. No improvements expected there.

* Tuesday: New home sales are expected to rise again, from a pace of 454,000 for April to 460,000 in May. Makes sense. Existing home sales are at multi-year highs, after all.

* Thursday: The pending home sales figure for May will round out the real estate picture on Thursday. Look for a 1.5% increase, which isn't a bad clip.

* Thursday: Personal incomes in May should be up 0.2%, while spending should be up 0.4%. If the numbers roll in as expected, it will likely have little to no effect. Should either or both numbers come up short, however, it will likely present problems for this vulnerable market.

Stock Market

Up until last week, though the market's major indices (DIA) (QQQ) (IWM) may have ebbed and flowed, the long-term uptrend had managed to remain intact. Things changed dramatically last week though. While there's always a chance stocks could stage a recovery, to do so now would be nothing less than a miracle.

Here's the deal. The S&P 500 (SPX) (SPY) closed under the 50-day moving average line (purple) on Thursday, for the first time since December. It also closed under the lower 20-day Bollinger band (thick, blue) on Thursday, again for the first time in months. Although we saw a slight uptick on Friday, that move didn't undo either of the key crossunders we witnessed on Thursday. You can also see the S&P 500's close of 1592.43 on Friday was beneath what had been a critical line in the sand - support as well as resistance - at 1598 (dashed). That's key, as when you see something happen that you haven't seen happen in months, it means something is clearly changing.

S&P 500 & VIX - Daily Chart
(click to enlarge)

Before you throw in the towel, know that it's not like the bulls are without any ammunition here. Two specific things happened on Friday that will give the market a fighting chance to recover this week. First, the 100-day moving average line (gray) blocked the downtrend and gave the market something to push off of. Second, the snapback rally on Friday unfurled on huge volume; it had a lot of participation. Could this be a sign that the masses are ready to jump into a rebound? Could be.

Ready to plow back into stocks based on Friday's bullish clues? Before you do, take a look at the weekly chart.

Remember the bullish trading zone we've talked about for the past few weeks? That ceiling and floor had framed the rally all the way back to November. They're the dashed lines on our weekly chart below. Well, the lower edge of that bullish zone failed to hold the S&P 500 up last week…for the first time since November. As we mentioned above, when we see something happen for the first time in months, it's generally an indication that something significant is changing for the market. Take a look.

S&P 500 & VIX - Weekly Chart
(click to enlarge)

You can also see on the weekly chart how the CBOE Volatility Index (VIX) (VXX) is once again working on a rally that will push it above its upper 26-week Bollinger band (orange) at 18.90. We've seen this effort a couple of times before (June of 2012, and January of this year), though the rebound effort faded in both instances. This time, though, it looks as if the VIX is starting out with a more sustainable pace. If we get a couple of consecutively higher closes above 18.90 from the VIX, be worried about the market…. especially if by that time the S&P 500 has moved beneath the 100-day moving average line at 1577.74.

In the meantime, the bulls need to push the S&P 500 back above the 20-day moving average line - currently at 1631.74 - before we can give any serious consideration to the possibility of a full-blown recovery and restart of the rally.

Source: Market Outlook - Key Levels Broken