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Traders watching for signs to see if this selloff is the big one

With two ugly days for stocks, traders think it's too soon to say for sure whether this selloff is the long awaited 'big one.'

U.S. stocks have been swept lower in a global "risk off" selling spree, which began after China manufacturing data showed contraction and created fears of a global growth slowdown. Emerging markets have felt the brunt of the pain, from Istanbul to Buenos Aires.

Traders do see continued volatility and more selling into next week when the Fed is expected to decide on further curbing its bond buying program. On Friday, the Dow and S&P 500 both broke below their 50-day moving averages, a negative sign, and the VIX, which measures market fear, saw double digit percent gains.

While the 'big one' is relative, several strategists have built a correction of 10 percent or more into their forecasts for this year. Still, they mostly expect the market to end the year higher, even after last year's 30 percent gains.

"I don't think this is a correction. I had felt that the biggest threat of a correction was overexuberance. This is minor volatility. This is nothing," said David Bianco, Deutsche Bank chief U.S. equity strategist. "I think where the S&P belongs at this moment is 1800, plus or minus...I think in the next few months we stay in the 1750 and 1850 range. I would say it's most likely we don't even fall 5 percent from the high of 1848."

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Others agree. "Overall, we don't think this correction is going to turn into much. There's pretty good support for the S&P at 1800. That's kind of where I would expect this to gravitate down towards. Below that, it's 1775," said Andrew Burkly, Oppenheimer Asset Management head of institutional portfolio strategy.

A combination of factors triggered the sell off Thursday, most prominently concerns that a slowdown in China will bite into global growth. A flash Purchasing Managers' Index (PMI) report from HSBC showing a contraction in Chinese manufacturing activity spooked world markets. Despite an improvement in European PMIs later in the day, world stocks remained under pressure.

(Watch this: Blankfein: Emerging market opportunity in long term)

Then in the U.S. session, existing home sales were weaker than expected, as was Markit's PMI, and while that data point hasn't been a big market mover, negativity prevailed and stocks sold off. The Dow Thursday fell 175 points to 16,197, the S&P 500 fell 16 to 1828 and the Nasdaq fell 24 to 4218.

On Friday, all three were down more than 1 percent. At the same time buyers have flocked to Treasurys, driving yields lower. The 10-year yield was at 2.729 percent, the lowest since Nov. 26.

Scott Redler of T3Live.com said stock traders were fairly optimistic ahead of the China data, so many were long Wednesday and that forced them to sell into the decline Thursday.

"We sliced through the eight-day and closed near the 21-day (moving average on the S&P.) This is the second time it happened in 2014, and I would say the bears have short-term control right here," said Redler, who follows the market's short-term technicals

The S&P fell below the important 1815 technical level Friday. "A break and close below there seems to be an air pocket down to the 1765 area," Redler said. He said the next target is the 100-day moving average if the selling continues.

"If the bears close the market below the 50-day, the 100-day which stands at 1770ish is a feasible spot next week. Covering some shorts into 1800ish makes some sense but probably not the time to buy the dip 'yet,'" he said in a quick note Friday.

Adding to the sour mood was a sell off in emerging markets, with some impacted by the broader sell off, such as Mexico and Chile, and others reeling on their own stories, like Argentina, Turkey and Brazil. Brazil was impacted by China but also negative comments from Pimco on its finances.

(Read more: Brazil's Rousseff tries to woo jittery investors at Davos)

Argentina's currency plummeted Thursday amid signs its central bank was running low on foreign currency reserves. Turkey's central bank tried to prop its currency back up. Those currencies continued to weaken Friday.

(Read more: Chinese data's ripple effect on markets)

The big market washout also comes ahead of the Fed's meeting next week, where it is widely expected to vote to cut back on its bond buying program for a second time. The Fed in December voted to cut the program to $75 billion in monthly purchases from $85 billion.

"I think this has been a factor from the very beginning. The weakness we've seen in the last seven or eight months, its roots were embedded in changes in Fed tapering," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank. "The Fed is trying to tell us it's not tightening but EM currencies, or selective currencies see it as the beginning of less accommodation. We're still seeing the fallout."

(Read more: Turkey's lira plummets to record low)

Ruskin said the shakeout could continue, as interest rates in some countries aren't attractive enough for longer term investors. "If you want to really generalize, there is certainly fragility in the likes of Turkey, for example, Argentina. The other fragile five are still fragile," he said.

(Read more: Argentina surprises markets by relaxing currency controls)

"I think this is one where the markets are leading the fundamentals rather than the fundamentals are leading the markets," said Robert Sinche, global head of foreign exchange strategy at Pierpont Securities. "It's certainly not the Fed 's job to try to understand and respond to market sentiment. My sense is they'll be concerned but unmoved by what's going on and markets are going to have to sort themselves out."

Sinche said the market is also reflecting a reshuffling of positions, by investors who had gone with "conventional wisdom" trades of long stocks and short bonds at the beginning of the year and now need to adjust.

"History suggests when liquidity creation starts to slow, you get a pickup in volatility and we're probably going to see that over the next couple of months," Sinche said.

Burkly said he is keeping an eye on U.S. data, and is watching the Citigroup economic surprise index, which measures the beats and misses of economic data against economists' forecasts. It is seen as positive for stocks when the data beats forecasts, and the index is rising. Burkly said the index peaked about a week ago and looks to be rolling back down.

(Read more: Global slowdown scare sends stocks into tailspin)

"Obviously that would be the worst case scenario, the economic momentum starting to slow just as the Fed starts to ratchet things up. We do have these weather distortions in the data…we don't' think that's going to turn into much though," he said.

The sell off also comes in the first leg of an earnings season that has had its share of high profile disappointments, despite the fact that beats are handily outpacing misses. GE, IBM, Intel, Verizon and Johnson & Johnson all moved lower on misses, hurting the Dow. Microsoft delivered a positive surprise when it reported Thursday afternoon.

BMO Private Bank CIO Jack Ablin said the earnings look in line so far, but he was disappointed by GE and IBM in particular. "Those to me are great barometers of business. For this economy to run, I'd like to see a hand off from consumer to business," he said.

As for the sell off, he said it's unclear whether it is the beginning of something bigger though he'd said he would be a buyer of the market 10 to 15 percent cheaper, an area he says would be closer to fair value.

"China is a work in progress. …They'll get to where they need to be. It's just not going to [happen] at a point and click speed. Investors are going to get frustrated," he said.

As for the U.S. market, "we've got a relatively favorable market. As long as the economy continues to accelerate and liquidity is still pretty strong, we should be okay. It's possible we could get a 10 percent correction, and I'm not going to call clients and say we need to bail out."

—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.