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Stocks made good on the reversal effort from a couple weeks ago, moving back above a few key levels on the heels of a not-so-scary picture of Japan, and Friday’s upward-revised GDP number for Q4 of last year. Will it be enough to prod the market higher again this week? Or, will investors remember that stocks were overbought and headed lower even before Japan’s earthquake and radiation risk?

We’ll look at the bullish and bearish argument below, but first, a look at the bigger economic picture.

Economic Calendar

Last week was a fairly light one in terms of the amount of economic data thrown at us, but a big one in terms of impact… especially on the real estate front. And, it wasn’t a great one. Existing home sales fell from 5.4 million to 4.88 million, housing prices fell 0.3% after the prior month’s 1.0% decline, and new homes sold at an annual pace of 250K in February versus 301K in January.

We didn’t see much progress on the unemployment claims forint either; new claims of 382K and ongoing claims of 3721K were both right around the prior week’s levels.

Durable orders also slumped in February, by 0.9% with cars, and by 0.6% not counting cars.

The only bright spot last week was barely even a bright spot for last week – Q4′s (of 2010) GDP ended up growing 3.1% instead of the previously-guessed 2.8%. All well and good, but considering we’re days away from Q2 of 2011, it’s a little meaningless now.

Economic Calendar

There’s a whole lot more in store for this week. Here are the biggies to watch for:

  • Monday: Personal incomes should have grown by 0.3% last month, and spending should have grown by 0.5%.
  • Tuesday: Consumer Confidence is expected to have fallen sharply – to 65 – for March.
  • Wednesday: We should have seen job growth in March, but fewer jobs than we saw created in February. The ADP number should roll in at 210K versus the prior 217K.
  • Thursday: Factory orders are estimated to have limped high last month, by 0.4%. That’s well under the prior month’s increase of 3.1%.
  • Friday: It’s D-Day for the unemployment scenario on Friday. We’ll have a basic idea of what’s in store from Wednesday’s job cuts and job growth numbers, but on Friday we’ll get the unemployment rate (expected to be 8.9% again), and the official nonfarm payrolls growth. The forecasters are looking for net growth of 185K, which is less than the prior month’s 192K, and in line with the ADP number.

S&P 500 Index

The good news for the bulls is, the S&P 500 (SPX) (NYSEARCA:SPY) gained 34.6 points (2.79%) last week, and crossed back above the 20-day and 50-day moving average lines as a result. The bad news for the bulls is, volume was pretty weak the whole time, and the market ended the weak with a fizzle rather than sizzle. Buyers may have been making their way to the door after week-and-a-half rally.

So where to next? Great question. Nothing’s ever for-sure, but an astute trader usually can figure out the path of least resistance. In this case though, the market’s in a perfect 50/50 limbo.

The upside scenario: Two weeks ago (15th through the 17th), the S&P 500 ran into its lower Bollinger band at 1260 and rebounded up and off of it… as is supposed to happen at lower band lines. And, the rally has made good use of the reversal effort, moving back above the 20-day and 50-day moving averages as a result. Momentum traders use these as key buy/sell signals, and as such, argue that the market is back in bullish mode. The momentum should at least be able to carry the SPX back to the upper band at 1343. Even once there, the S&P 500 could gently push the upper Bollinger band higher as it continues to make progress.

The downside scenario: The shape of Friday’s bar, with the open and close near the low, suggests that former buyers are now sellers, taking advantage of the recent rally to take some profits. More of the same may be on the way though, as the shape of that bar is also the beginning of a new trend. Moreover, though the market rallied last week, that buying was on very low volume…. and doesn’t necessarily indicate the majority opinion. The bears will undoubtedly say that the pullback from the CBOE Volatility Index (VIX) (NYSEARCA:VXX) (NYSEARCA:VXZ) has also been slowing, and even hinted at an upside reversal of its own on Friday.

Take a look.

S&P 500 – Daily

The million-dollar question from here is, which of these two scenarios has the highest odds of playing out?

As we said above, the odds of one over the other right now are about as 50/50 as the market ever serves up. But, in our view, the bearish scenario actually has the slight edge here.

Whether or not we’re getting clear short-term bearish clues from the chart itself, we do know that in the grand scheme of things we’re still overdue for a healthy, normal correction. The move from February’s peak to March’s low was only a 7.0% dip, following an almost (and uninterrupted) 30% gain. That’s well shy of a normal corrective move of 10% to 15%. So, by normal standards, we still have to give up more ground before we can fairly expect to move higher in a meaningful and long-lasting way.

The weekly chart of the SPX puts that idea into a better visual perspective.

S&P 500 – Weekly

As for how to play it, here are the ideal strategies as we see them.

  1. Now’s not the time to get long; if you’re not in yet, there’s not a lot of risk-adjusted return potential from here. When-and-if the SPX encounters the upper Bollinger band at 1343 and doesn’t back down from it (and pushes upward instead), then the bulls will decidedly be in control.
  2. If the S&P 500 slides back under the 20-day and 50-day lines (1301 and 1305), that will serve as a new sell/bearish signal, and we can look for at least a move back to the lower Bollinger band at 1268 again. That move itself will be trade-worthy on the short-term. If the index manages to push under that lower band line and continue pressing lower for a two or three days in a row (as opposed to the reversal a couple of weeks ago), that will act as an intermediate-term sell signal.

Just for reference, a move back to the all-important 200-day moving average line (green) at 1190 would represent an 11% pullback…. right in line with what’s viewed as a more normal correction.

Sector Performance

Last, a quick look at how the major sectors have been stacking up since last week, though none of it should be a real surprise; energy and materials are back on top (with a nice showing from the industrials), while utilities and telecom are still in the gutter.

The only item of interest is the way the technology sector is bouncing back so firmly following a pretty rough February. If stocks manage to keep cranking out gains – which is against the odds – then technology may be something to make sure you add to your repertoire.

Overall though, there’s not a whole lot here to worry about just yet.

Sector Performance, since November 30th

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.