Overall I'd say this looks OK, although still a bit hurried and "tight" in many places.
Segovia or Avila is a tough call. If you really like medieval fortifications, Avila is tough to beat, but it doesn't have much else there to recommend it besides the big walls. Segovia has more going for it in terms of sights and a "feel" - and if you like Roman stuff, the aqueduct is one of the best Roman ruins anywhere. I'd probably give the edge to Segovia.
Consider spending one night in Toledo. Yes, you can do Toledo as a day trip. The problem is, most people do exactly that, and during the mid-day it is often quite crowded - which really changes the experience. Mornings and late in the day, the city is nearly deserted and it's really very magical, IMHO a much better experience. Going there and back and being there will consume an entire day anyway, so why not just stay the night - the time you use up will be about the same, but rather then getting back to your Madrid hotel late that day, you'll get a better experience in Toledo.
Is Faro really a destination for you, or is it just a way to connect to Lisbon? Faro is OK, but it's certainly not on a par with the other 5-star locations on your list. Unless you have some reason to go there (coming from Sevilla via bus, how much of a day are you really going to have to spend there?), you might consider skipping Faro entirely and just getting to Lisbon as quickly as you can. There are (apparently) flights from Sevilla to Lisbon (try TAP), or you can certainly fly from Madrid to Lisbon inexpensively. I'm just looking at your itinerary an Faro seems like it doesn't merit the stop.
Finally: get your tickets to the Alhambra NOW (or as soon as you know what day you'll be there).
Lots of really great stuff on your itinerary - you'll have a great trip. Good luck!