"I ran it on the scanner and when it started to spark knock we watched the timing retard to 3-5 deg and it was still spark knocking and cant figure out why it spark knocking when the timing retard's down to 3-5 deg,"
It sounds to me as if the knock sensor is working. My concern would be why is it knocking in the first place.
Possible causes as I see it.
1-too much timing advance.
2-air/ fuel ratio to lean.
3-hot spot in combustion chamber.
4-egr not functioning properly.
5-compression ratio to high.
6-fuel octane too low (if contaminated with oil can have same effect)
7-too much boost for fuel octane (can rule this out
)
You mentioned the rear O2 sensors read rich. Now I really don't know how the computer reads or adjust for the rear O2 sensors but generally I would assume if the computer believes the air/fuel ratio is rich it will continue to lean it out till it gets the reading it is looking for. I believe if O2's get contaminated by lead, coolant or ?? they will react slower and read rich. (based on experience with my mustang)
It would be nice if you could test your air/fuel ratio to rule this out