So what happens to stocks now?

Published Wed, Oct 8 2014 2:15 PM EDTUpdated Wed, Oct 8 2014 2:44 PM EDT

First a selloff, then a rebound. The market has struggled for the past two weeks. Don't forget, on Sept. 2nd, the market came under this same kind of pressure it did on Tuesday: Technical levels got slammed and the market cut through them like a hot knife in butter only to snap back in a knee-jerk reaction rally. That rebound made sense.

So, what happens now?

Traders work on the floor of the New York Stock Exchange (NYSE).

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First of all, there are some legitimate macro concerns that are causing investors to pause — not bail, but pause. Next, there are non-macro concerns — whether they are geopolitical or otherwise — that are causing traders to hit the "sell" button. Then, there is just the pure technical response to broken levels of support — levels that cause some risk-management software to initiate sell orders, while causing other risk-management software to hit the "buy" button — just reacting to pure technical levels. Either way, the noise creates the opportunities for traders as well as investors.

On Tuesday, the Dow sold off 1.6 percent while the and Nasdaq slipped by 1.5 percent and the small-cap Russell Index fell by 1.3 percent. The only index in correction territory is the Russell, now down 11 percent from the recent high — and fully explainable. That index is comprised of the 2,000 smallest public companies in the country — companies that maybe should not even be public (but that's another conversation) or companies that don't have a deep or broad enough investor base to provide stability and smooth out the volatility. So, when traders/investors raise the caution flag, those most naturally become the first victims and end up dragging the index far lower. The other indexes are off 4 percent from their highs, suggesting that the recent action and Tuesday's pressure is nothing more than short-term noise as the market tries to find new levels of support.

And why does it need to find this new level? Easy: The thrashing it took on Sept. 2 caused many of the technical levels to be breached — levels that now need to be re-established. The market tested 1950 in the first few minutes of trading Tuesday and held there all morning, trading on either side 1948/1954 back and forth, back and forth... As the afternoon wore on, buyers got tired and chose to move lower. The selling algorithms sensed this and shifted into overdrive — and selling begets more selling. The buy-side computers sense the break and move lower again. And the cycle continues until the sellers are exhausted or they pull back and re-assess.

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In light of some of the latest macro data points — those out of Europe and Germany along with the most recent IMF statements about global growth in 2014/2015 — other investors will decide their level of risk appetite. Throw in more Fed talk and you have every reason for negativity. But which piece of news was new? The only new piece of data was Germany — everything else is old news. The market already knew the IMF concerns, a weaker Europe and the Fed withdrawal.

So, I believe that this was much more of a technical selloff than a fundamental selloff.

Now add in earnings, which are just getting started, and we will begin to get a picture of what CEOs and CFOs are seeing, what are they saying and what are they thinking. What does the future look and feel like? What will dollar strength and a possible European recession do to forward guidance? By now, we should know what most are thinking — any possible disappointment should have been addressed already. Any listed company that has not taken the bull by the horns prior to announcing earnings and then announces a disaster deserves to be punished hard by investors — and surely will. The smart ones — Ford for example — made sure that everyone knew their concerns a good 3 weeks prior to their announcement. Yes, the stock got punished, but less so than if they had not. Investors had to re-price that stock based on the new outlook — an outlook that the CEO owned. I would hope that other CEOs who may be concerned took that lead. If not — watch out.

Let's be clear — the selloff Tuesday only took the broader market down about 4 percent off the highs. So, correction? Not so much. Trading opportunity? Absolutely. Correction territory in the S&P would take it down to 1800. Anything short of that is well within the normal bands of trading.

Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The author does not own shares of AIG, Goldman Sachs or any other company mentioned in this article. The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.

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