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Rally in hand, traders eye data

As stocks attempt to hold the recent recovery from correction territory, the Street will get another look on Friday at some of the factors the Federal Reserve is eyeing in timing a rate hike.

The final read on August consumer confidence from the University of Michigan at 10 a.m. ET, takes particular prominence. In comments Wednesday, New York Fed President William Dudley singled out the index as an indicator of the volatile stock market's impact on the economy.

Dudley said the case for a September rate hike has become less compelling. Central bank policymakers continue their annual meeting in Jackson Hole, Wyoming, on Friday.

Trader on the floor of the New York Stock Exchange.
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Trader on the floor of the New York Stock Exchange.

"We feel Dudley's comments are broadly consistent with our view that the odds of a September liftoff have dipped below 50 percent, but are not zero," J.P. Morgan said in a note Wednesday.

The initial read on August confidence was 92.9, down slightly from July's 93.1 print.

The Fed's preferred gauge on inflation, personal income and outlays, is due at 8:30 a.m., ET.

Read MoreFed needs to make a move: Ablin

Thursday's better-than-expected GDP report showed consumer spending increased at an upwardly revised 3.1 percent. The upward revision of overall second-quarter GDP to 3.7 percent and a decline in jobless claims add to recent data that indicates a strengthening U.S. economy.

"The GDP report today certainly affirms our view that the U.S. economy is strong. Given that we remain very committed to the equity market we have not changed our positions," said Cam Albright, head of investment strategy at Wilmington Trust Investment Advisors, which as $76 billion in assets under management.

The data and a recovery in oil prices helped U.S. equities extend their recovery for a second day, with the major averages closing up more than 2 percent and out of correction territory, on track for weekly gains.

The Dow and Nasdaq fell into correction last Friday, before the S&P ended there on Monday. Many analysts said the correction was not likely to become a bear market because solid data did not indicate an imminent recession.

However, investors expect more volatility in the coming weeks as markets seek a bottom amid continued uncertainty over the Fed and the global impact of slowing growth in China.

"I still think that we've probably got some questions that are going to come out of China. I'm very cautiously optimistic about what's coming out of U.S. markets," Albright said.

John Canally, investment strategist and economist at LPL Financial, said markets are "probably going to be cautious" on Friday going into the weekend ahead of possible moves by Chinese authorities that could negatively impact markets again.

Read MoreBottom for stocks may be in: Street

Many analysts point to high levels on the VIX, widely considered the best gauge of fear in the market, as an indication that stocks may not be firmly in an upward track.

The VIX spiked above 50 on Monday and traded near 26, above the 20 level analysts would be more comfortable with.

In the last two days of the rebound, buying accelerated into the close, while selling picked up into the close on Tuesday.

"I think the bounce continues but probably not at the pace we've seen in the last few days," Canally said. "This initial bounce is going to be driven by the things that hurt the most: energy, technology."

LPL Financial is selectively adding to their positions in those sectors as stocks bounce, he said.

The energy sector surged nearly 5 percent to lead S&P 500 gains Thursday, boosted by a more than 10 percent surge in crude oil for its best one-day gain since March 2009. Analysts attributed the move mostly to short covering.

"I see the markets tomorrow (Friday) trending slightly sideways or possibly negative, and we'll be looking at 2,000 in the S&P as a ceiling that if broken through we could see a little more uptick in the markets," said Michael Wall, president of Retire Well.

"Something we are watching and looking to purchase into probably the beginning of next week is oil and certain MLPs that offer nice yields," Wall said. "We want to prepare for the fall season, colder weather, an increase in demand, which I believe will yield some growth in that area."

Read MoreWhat Texas drillers are saying about $40 crude

S&P 500 announced after the close that Activision Blizzard will join the index, replacing Pall (which is being acquired by Danaher) after the close of trading on Friday. United Continental will replace Hospira (which is being acquired by Pfizer) in the index after the close on Sept. 2.

Earnings due before the open Friday include Big Lots and the Bank of Nova Scotia.