Another Bumpy Ride in Store for Markets

Getty Images

A trader works on the floor of the New York Stock Exchange.

Thursday could be bumpy, as rising interest rates continue to shake up markets and traders watch foreign exchange markets with a wary eye.

"It's a trade of reallocation. Money moving out of asset classes into other asset classes causes that kind of volatility and lack of liquidity," said Paul Hickey of Bespoke. He said he expects to see a stock correction in the single digits at most. "This kind of activity is the kind of activity you see when the market is going down."

(Read More: Why Cyclicals Are Hot for Investors This Summer)

Stocks have been highly volatile as interest rates move higher – the 10-year closed at 2.22 percent Wednesday - and world markets followed each move in the yen.

"You don't tend to see slow and steady declines," said Hickey of the volatile stock trading. After moving in a 250-point range Wednesday, the Dow fell 126 to 14,995, its third down day and the first three day losing streak this year. The S&P 500 fell 13 to 1612, just above its 50-day moving average.

Traders Thursday will watch China, where markets reopen after being closed since last week and before a batch of weaker economic data was reported over the weekend. They will also be watching the Japanese markets and the volatile yen, which has led other markets in wild swings.

(Read More: A Silver Lining for the Volatile Nikkei)

"There's concerns about carry trades blowing up," said Art Cashin, floor director of UBS. Rumors have circulated about a hedge fund that bet the wrong way on the yen and Japan for the last several days. "The two lead dogs are the yield on the 10-year and currencies, particularly the yen," Cashin said. When the yen moved higher Wednesday, stock selling intensified.

"The S&P's probably not going to have as much luck bouncing off the 50-day moving average, the way it did the first time last Thursday," said Scott Redler, who follows the short-term technical aspects of the market. The S&P hit 1605 last Thursday and rose off of it in a big surge when Friday's jobs report was released. But Redler said the second effort does not usually go that well, and the S&P is now just above the 50-day moving average of 1610.

(Read More: Why Bullish BofA Thinks Market Gains Might Be Over)

"I think today's kind of action raises the possibility we'll see the 100-day which takes the S&P down to 1576," he said. Redler added that a lot of stocks have broken through their 50-day moving averages already, including home builders. "The market gapped up today and was sold right away on key resistance and even had rare downside follow through which has been something generally not seen in 2013," he said.

The markets are also looking ahead to next week's Fed meeting, where traders hope to get some clarity on the Fed's plans to pare back its $85 billion a month bond purchase program. The Fed has made clear that it needs to see data that collaborates that the economy is improving.

(Read More: For Some Investors, Federal Reserve Can Start Tapering NOW)

"I think even the doves on the Fed are beginning to realize that QE [quantitative easing] has done too much damage, allowing people to put on too much risk and blindly getting involved with carry trades," said Pierpont economist Stephen Stanley. "I actually believe they're looking for an open to start pulling back soon. My guess is it's September."