With the weekend in sight, traders are likely to play defense Friday after Thursday's big stock market wipeout.
Stocks were slammed Thursday, as bond yields fell and the 10-year note yield dropped below the key 2.50 percent level. The Dow had its worst day in five weeks, losing 1 percent to 16,446, and the lost nearly a percent to 1,870.
But the Nasdaq and Russell had an interesting recovery late in the day. Both led the market lower but both reversed some losses in the last hour, with the Nasdaq finishing down 0.8 percent at 4,069, and the Russell 2000 down 0.7 percent at 1,095. At one point during the day, the Russell dipped to 1,083, more than 10 percent from its March high.
"I would say we have a technical tsunami going on," said James Paulsen, chief investment strategist at Wells Capital Management. "You have the Russell (2000) with a 10 percent correction, a technician's delight, and you have the S&P 500, failed at 1,900, also a technician's delight. The 10-year broke below 2.5 and the dollar broke to new lows for the year last week."
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Paulsen said the question Friday will be whether dip buyers come in, supporting prices, and the fact that the Russell and Nasdaq came off their lows in late trading was a positive.
"That's a lot of stuff. I just think it scares people," he said. "It's been building up. People have been watching the Russell collapse, and what does the bond market know that the stock market doesn't?…Technicians will say all the moons and stars have aligned."
Stocks were spooked by a number of things Thursday, including a decline in industrial production and weak sentiment from the National Association of Home Builders. Those two areas of weakness—manufacturing and housing—are key legs of the recovery.
Housing has been showing a worrisome lack of strength so housing starts will be an important piece of data when released Friday at 8:30 a.m. ET. Consumer sentiment is released at 9:55 a.m.
Paulsen said both could effect the market Friday. "Consumer sentiment matters most if it goes down…If it goes up, I don't know if it will be that positive…Housing starts could be big if it goes up."
The market was also on edge Thursday because of comments from hedge fund manager David Tepper, who said he is cautious but wouldn't short the market. He warned investors "don't be too fricking long right now."
Stocks wobbled as yields sank Thursday, in part on concerns the bond market was signaling a weaker economy. But traders say the bond market was trading off the lower yields in Europe, reacting to reports and comments about European Central Bank easing.
Gabe Mann, Treasury strategist at RBS, said dovish comments from the Bank of England Governor Mark Carney also added to the buying in European and U.K. sovereigns. "I think the rally in bunds and gilts really matter. They're back to 2013 level as and that's probably dragging the Treasury complex lower in yield."
Short covering was also credited for some of the move in bonds. The 10-year yield was at 2.49 percent in late trading, and Mann said his next target is 2.47 percent.
Analysts say the move in stocks is not necessarily signaling the start of a much bigger correction.
Ed Keon, portfolio manager at Quantitative Management Associates, said the market is experiencing a rolling correction. "To me, that's a sign of a healthy, functioning market."
"When I look at the kind of things that lead to bear markets, I just don't see them. The economy looks to me like it's getting stronger, not about to fall into recession. Fed policy is clearly going to be on hold for quite a while," he said, adding Ukraine and Chinese growth remain concerns in the background.
"I don't see anything that's about to blow up. I don't think we're going to have a bear market, but could we see a 10 percent correction? Sure, but the chances of that are low," he said.
Keon said one positive for the market is that the earnings for the first quarter, expected to be flattish, came in 5 percent higher and forecasts are improving for the rest of the year. "I think the fundamentals are still quite good," he said.
"With this rally in the bond market and small drop in stock prices, you have bond yields now down to 2.5 percent and the dividend yield on the S&P is just south of 2 percent," Keon said. "If you buy stocks, you're giving up a mere 50 basis points in yield and you get the potential for growth that stocks represent."
With the 10-year yield at 2.51 percent Thursday morning, there were 148 stocks in the S&P 500 yielding more, according to Howard Silverblatt, index strategist at S&P/Capital IQ.
Paulsen said bond investors may use the strength to sell.
"I think if the bond yield went north a little while, people would calm down," he said.
What else to watch
St. Louis Fed President James Bullard speaks at 11:50 a.m. in Arkansas on the economy.
—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.