Whether stocks can break out one way or the other has been the question of the week, and the drama is building.
Naysayers on the market's recent gains are growing by the day, and investors waiting for a pull back so they can put cash in at a lower level are sidelined and frustrated. The Dow crossed the psychologically key 14,000 level Friday and the S&P 500 cracked 1500 the week before, two levels that traders say have the potential to trigger a pull back.
(Read More: Traders Search for Pullback Trigger as Fears Rise)
So, is there a scary head and shoulders developing in the S&P 500, as suggested by Art Cashin? Or, do we face an "earnings cliff" because of higher taxes and slower growth, as foretold by Blackstone's Byron Wien? Does the market have it all wrong and we're going to relive 1987, as per Seabreeze Partners' Doug Kass?
Despite all this talk, stocks meandered quietly back and forth Wednesday in trading that did little to settle direction. It did, however, provide a backdrop for a swirl of speculative talk, specifically whether beaten up Apple would buy back its stock and raise its dividend. The unconfirmed rumor was sparked by bullish comments from famed Legg Mason fund manager Bill Miller, but it gained momentum and zipped across markets, lifting stocks mid-morning.
"The pain trade right now is those calling for a correction, as they continue to lose money while the market rides higher," said Mark Luschini, chief investment strategist at Janney Montgomery. The Dow rose 7 to 13,986; the S&P was up less than a point at 1512, and the Nasdaq fell three points to 3168.
"The market is acting as though it's a bit overbought," he said. "I don't think a day like today is indicative of selling, as much as exhaustion of buying."
Cashin, director of floor operations at UBS, has been watching a quickly formed head and shoulders pattern over the last couple of days. Cashin said it's very unusual but very pronounced, and instead of forming a head and two shoulders, it appears to be working on two heads.
"The left shoulder was around 1510. The head was around 1514 and we were looking at a right shoulder back at 1510. They exceeded that, and we have a two-headed formation," he said.
Cashin said the S&P now needs to cross 1514 and hold above it, at a level like 1517 in order to break out of the pattern. But if the S&P instead heads to the neckline, at 1495, it could signal a downturn. The distance down it would go after that depends on the shape and time, he said, adding it could first go to 1475 or 1450.
What to Watch
Jobless claims and productivity and costs data are reported at 8:30 a.m. ET, and before that the European Central Bank holds a rates meeting and briefing, which could have some sway over the markets Thursday.
"It's all about Super Mario tomorrow," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. ECB President Mario Draghi holds a briefing after the ECB's 7:45 a.m. announcement. The Bank of England also meets Thursday morning.
Schlossberg said while the ECB is not expected to make a move on rates, it will be important to hear its outlook on the euro zone economy. "If the ECB continues to be negative on its near term forecast, that could weigh on the euro," he said.
(Read More: Signs of Recovery for Euro Zone, Optimism Builds)
The market also wants to hear whether Draghi will comment about the sudden strength in the euro, trading at 1.35 late Wednesday. The ECB will get extra focus this week, since reports of political corruption in Spain and an uncertainty surrounding the Italian election rattled risk markets Monday.
Luschini points out that the troubles that upset stocks this week were more about politics in Europe than economics, and regardless of what catalyst ultimately causes a selloff, he believes it will be a shallow correction.
"I'm still looking at a rotation into the more cyclical areas. You see basic materials and financials doing well, and small caps doing well. The transports have been down, but they're still doing well. These are the front of the bus things that you want to look at that are indicative of a market that is of bullish construction," Luschini said.
The two-day EU leaders summit begins Thursday, and traders are also watching that for currency related comments.
(Read More: Will Euro Kill Euro Zone Recovery?)
Chain stores are also expected to report monthly sales Thursday, the first since consumers have felt the pinch of a two percent increase in payroll taxes.
National Transportation Safety Board Chair Deborah Hersman provides an update on the agency's investigation into the Boeing 787 Dreamliner at 11 a.m.
There is also are a good variety of earnings news, including Sony, Vodafone, Statoil, Credit Suisse, Sanofi, Teva, KKR, Noble Energy, Starwood and Sprint Nextel, all before the bell.
Other earnings expected ahead of the open include Exelon, New York Times, International Flavors and Fragrances, Mack Cali, Lazard, Bunge, Cognizant and Snap-On. After the bell earnings include Activision Blizzard, LinkedIn , Coinstar, Columbia Sportswear, SunPower, Hasbro, Primerica and OpenTable.