Bulls and bears have been duking it out this week in the worst three day sell off for stocks in two months.
"We're in August now, one of the thinnest months of the year so it doesn't take much to push the market around," said Jordan Kotick, global head of technical strategy at Barclays. "August is one of the most bullish months of the year for rates, and September is a bearish month of the year for stocks. You take a thin market, a bullish rate environment, and a bearish equity environment in September, and you're going to have choppiness and pullbacks over the next several weeks."
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The Dow fell 48 to15,470 Wednesday, and is now down 1.2 percent for the week so far. The S&P 500 lost six to 1690, falling through key technical support at 1697/1700. It is now down 1.1 percent for the week. Buyers moved into Treasurys Wednesday, as the government auctioned $24 billion in 10-year notes. The yield was the second highest at auction since mid-2011. At the end of the day, the 10-year was yielding 2.60 percent.
Thursday's markets will be watching weekly jobless claims at 8:30 a.m. ET. Claims are always interesting, and now even more so since the Fed is watching employment data closely as it moves toward cutting back on its bond buying program.
Yet another Fed official Wednesday endorsed tapering the $85 billion bond purchases if the economy is strong enough. Cleveland Fed President Sandra Pianalto, a nonvoting member said if the labor market remains on the stronger path it's been on than she would endorse reducing the purchases. While markets have been expecting tapering in September, the talk about it from several Fed officials this week spooked stocks.
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"On Monday, the view was the taper was coming and nobody seemed to care," said Paul Hickey, co-founder of Bespoke Investments Group. "Now, it seems the taper is coming and everybody seems to be worried."
Hickey said the market needed to take a break from its recent run. "I wouldn't read too much into it," he said. "It's just a little profit-taking from overbought levels. I think if you saw another percentage or two on the downside, we'd become more interested there and maybe start putting money to work
Kotick said the stock market is beginning to follow a seasonal pattern. "The bull trend is still in place. There are no signs of significant deterioration medium-term, " Kotick said. "We are in the heart of the seasonal darkness…The last three Septembers, the market had fallen between eight and 13 percent." Kotick expects the trend to fade in October, as the market then sets up for a Santa rally.
Scott Redler of T3Live.com said the 1700 level on the S&P 500 is the key, and the market has to trade back above it if bulls want to regain control. "Today we pulled back to the 21-day moving average, something it has not done in a while and found some support. The market has come 22 handles off its highs, pretty discretely. It was a stealth pullback," said Redler, who follows the market's short term technicals. The 21-day moving average is around 1682, and the S&P fell to 1684 before moving back up.
Traders will also be watching the $16 billion auction of 30-year bonds Thursday at 1 p.m. "Like we saw today, there's clearly interest at a level…We're seeing a bit of a return of buyers who have been shy for a while in here," said David Ader, chief Treasury strategist at CRT Capital.
Ader said the bond market's lack of reaction to Chicago Fed President Charles Evans this week was telling even though stocks were rattled. Evans said Wednesday that he wouldn't rule out that the Fed could start tapering in September. "If the leading dove tells you they can taper in September, the cat's out of the bag, and the market did nothing. The market has embraced it," he said.
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Ader said he expects to see yields move lower, and there should be a concession in the curve heading into Thursday's auction. "Technically, we've made some important progress here. Coming out of this August refunding is the most bullish time of the year" for bonds, he said.
What else to watch
There are plenty of earnings on the calendar Thursday, including Fannie Mae, Rio Tinto, Agrium, Beam, Dean Foods, AMC Networks, AES, T-Mobile, Scripps Networks and Windstream, ahead of the market open. Lions Gate Entertainment, Priceline.com, Monster Beverage, Great Plains Energy and Annie's report after the closing bell.
—By CNBC's Patti Domm. Follow here on Twitter