Stocks moved higher again Thursday as traders shrugged off bad economic data and a number of notable earnings misses. A number of key sector groups (energy) and key assets (gold, copper) are moving higher -- possibly on inflation fears after Fed chief Bernanke made dovish comments in Wednesday's press conference.

Whatever the motivation, cyclical stocks have been in the tank for three months now and could very well be trying to piece together a quick rebound -- a rebound that would violate the big head-and-shoulders reversal pattern that worries many people on Wall Street. As they say, there's nothing more bullish than a failed bearish pattern.

Here's what to watch for and how to play it.

That chart above of the NYSE Composite (NYA) illustrates the danger. Patterns like these are a reflection of investor sentiment. The initial rise into February was marked by broad participation and excitement over the better-than-expected​ January payroll report -- despite the fact that a careful analysis suggested the report masked deeper signs of trouble.

The rise into the March high has driven by a narrower group of stocks as hedge fund types started heading for the exits as the economic data turned negative.

Now, even as the economic data get worse, key stocks and assets are moving higher and pushing the NYSE Composite back over its 20- and 50-day averages. Is this the start of a new uptrend? Or merely the formation of the "right shoulder" of an epic reversal pattern?

To be honest, it's too soon to tell. But there are signs that we could trade higher for a few weeks before the downtrend resumes. So we could be seeing the formation of an extended right shoulder that could go above February's highs before crashing back to mid-December levels.

Why? Inflation expectations are moving higher again with iShares TIPS Bond Fund (TIP), which is tied to inflation-protected Treasury bonds, pushing to new highs. Currency flows are also partially responsible, with the U.S. dollar dropping below its 200-day moving average as it falls out of a three-month bear flag pattern.

Both higher inflation expectations and a weaker dollar are being driven by the Fed's increasingly dangerous blasé attitude toward inflation risks and its willingness to pump more cheap cash into the financial system at the slightest sign of economic cooling. As a result, traders are beginning to view weaker economic data in a positive light, since it increases the odds of another round of quantitative easing at the Fed's June policy meeting.

And when inflation expectations are higher and the dollar is lower, that's great news for key commodities like copper and gold -- both of which are moving higher. Gold, in fact, could be preparing to pop out of a long downtrend pattern it's been mired in since last summer.

In stocks, energy (thanks to natural gas prices stabilizing), semiconductors, biotech and select materials names are pushing higher -- all of which are cyclical stocks that tend to lead the overall market.

As a result, I took profits in my remaining short positions -- including a 28.7% gain in my bet against National Bank of Greece (NBG) since Feb. 22 -- and have added a number of new long holdings to the Edge Letter Sample Portfolio. These include iPath Total Return Natural Gas (GAZ), VelocityShares 3x Gold (UGLD) and Aurizon Mines (AZK) to benefit from gold's rise, NPS Pharmaceuticals (NPSP), and energy plays Comstock Resources (CRK), Tidewater (TDW), and Talisman Energy (TLM).

I found these additions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

Disclosure: Anthony has recommended GAZ to his newsletter subscribers.

Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.