This column was originally published on RealMoney on March 20 at 11:43 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

I've written a number of cautionary columns this year, warning readers we're stuck in a rangebound market that's doling out meager rewards to bulls and bears. Last week's rally exposed the gentler side of this bipolar tape and triggered fresh waves of bullish bluster. So what happens next?

Logically, this is the proper time to slap wrists and wag fingers. But I'm not inclined to do so, because the trading range could finally break to the upside and let a broad range of stocks, including tech and semiconductors, rapidly advance to new highs.

The majority of my growing optimism comes from the bank stocks. In February, the Philadelphia Bank Index (BKX) broke out above two-year resistance at 106 but immediately stalled out. The index wobbled back and forth across the breakout line for three weeks before confirming the breakout last week.

This signals tremendous upside potential for the banking sector -- the weekly pattern predicts a rally equal in size to the 40-point recovery in 2002 and 2003. However, the recent head fake between 105 and 108 makes it harder to predict when these stocks will actually generate upside momentum. (See chart below.)

I'm also encouraged by the calendar. There are only two weeks left in the first quarter. Last week's unexpected rally suggests that window-dressing has begun a few weeks early, with big money betting heavily on the upside. This considerable influence should keep a floor under the market into earnings season next month.

Will earnings reports support a spring rally? It's a tough call, because performance has been relatively weak through a broad variety of sectors. But it's possible that analyst estimates have been trimmed enough to increase the number of upside surprises in April. In any case, first-quarter performance shouldn't hurt the developing uptrend.

Despite supporting factors for a spring rally, last week's uptick also raises several cautionary signals. First, it took place during March triple-witching. It makes sense that bears were targeted during this period because of growing pessimism ahead of quarterly expiration.

The leadership of last week's rally also demands scrutiny. Interest-rate-sensitive stocks dominated the list of top performers. It's obvious this was a reaction to the short-term pullback in Treasury yields, following a rapid move to new highs for the year. It's also obvious that short-covering provided most of the fuel for this move.

Energy stocks trailed just behind rate-sensitive issues during the rally. Crude oil is back above $64, even though supply and demand had predicted a far deeper pullback. Undoubtedly, we're looking at a seasonal run-up that could last into Memorial Day and beyond.

The S&P 500 can emit false signals when energy stocks dominate the leadership board. The overweighting of the group tends to lift the index, but also revive inflation paranoia and recession talk. In the last two years, fast moves in energy stocks have ignited index rallies, but undermined broader recoveries. The same thing could happen this time around.

Precious metals stocks also led the market last week. Their strong performance goes hand in hand with the renewal of inflation worries that might derail a spring rally. But options-related short-covering also played a major factor in this move. In fact, the Philadelphia Gold/Silver Sector Index (XAU) rally into resistance signals a fresh short-sale opportunity in the underlying stocks and commodities through the end of the quarter.

The continued divergence between blue-chip leadership and tech underperformance raises another red flag that can't be ignored. But this is exactly where we need to look for the unexpected to happen in the next few weeks. It might start with the blue-chips stalling out while tech stocks continue to move higher.

Tech-stock bulls must have been disheartened by last week's limp action. I really hope so, because these people have been standing in the way of a legitimate tech rally. In recent months, their blind enthusiasm has drawn in waves of weak-handed buyers that short-sellers are using to find bids and then tear down prices.

But this particular game has been played out so many times that I suspect it will no longer work well for the short-sellers. This supports a scenario in which tech stocks move higher while shorts hit them hard but fail to knock down prices. In turn, they could get more aggressive with bigger bids that also fail to knock down prices.

These dynamics can draw in significant buying power and trigger an explosive melt-up rally. That's why we need to watch closely for a massive squeeze in the year's biggest laggards: the Nasdaq 100 (NDX) and Philadelphia Semiconductor Index (SOX). Undoubtedly, their performance in the next few weeks will determine the fate of the budding spring rally.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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