There are lot of traders trying to dismiss, or put a happy face upon Thursday’s plunge and Friday’s weak bounce. That’s what you do when you buy into a sucker’s rally and then get blind-sided by something like Thursday morning’s unemployment-claims number.

Those same trapped bulls were the reason why the market could not lift on Friday even though it should have been able to manage an oversold bounce – especially with oil continuing to fall. The trapped bulls just kept unloading their positions into any lift. They want out.

So, the market is selling-off well in advance of Friday’s jobs number. Of course, there is no way of knowing what that number will be given how the politicians statisticians at the BLS arrive at their numbers. But the reality of the main-street recession is finally starting to sink in. And that means more selling – lots of it.

Where do you think the S&P 500 will go when the unemployment rate goes to 10%? That’s the number that Marty Chenard at StockTiming.com is projecting.

I don’t have an estimate for the unemployment rate, however, I think we are about one-third of the way down to the bottom of the jobs trough. We are tracking the 2001 recession pretty closely, only this one is worse. Eventually, the official numbers will show that.

Was July 2001 anywhere near the bottom of the last recession? No, and neither is July 2008 anywhere near the bottom of this recession. And if the recession had been priced-in, the market would not have jumped out of the window on Thursday morning.

The July 15th low will be tested, and found wanting. You heard it here first.

Helene Meisler made a good point about the XLE on Thursday. If you look at the daily chart, you will see it go over the cliff right after the end of the second quarter. An excellent example of how big funds levitate their stocks to make their quarterly numbers look good. How much longer will the sell-off go? I don’t know, but if the XLE floats up on light volume for a day or two, that will be another bear-flag pattern, after which another leg down could be expected.

I updated my housing-vacancies chart today. There was a small tick down in the vacancy rate, but there are still an astounding number of houses sitting empty. And now the home-builder stocks are rallying, when we probably don’t even need a home-building industry at all for years to come.

If the sell-off continues Friday morning, keep an eye on the volume. Heavy volume will be a bad sign.

Watch the comments for updates on Friday.

Back on July 6th, in a post titled “No Bottom For SPY“, I used a “broadening” pattern to correctly predict that the S&P 500 would fall through its March low. Here is the chart that I used back then (click to enlarge). The pink lines outline the broadening pattern:

Here is an updated chart. (The blue lines on the charts labeled 126.09 highlight SPY’s intra-day low on March 17th.) Look how it developed! The lower line of the broadening pattern (in pink) set the slope for SPY’s decline right down to the bottom on July 15th!

Now look at the new broadening pattern (in black) birthed on Tuesday of this week as SPY burst back above the March low. One of those black lines will likely set the trend going forward. Will it be the top one or the bottom one? Will plunging oil send stocks up to the top line? Or will the crumbling economy send it to the lower line?

If you know the answer, please post in the comments. I am agnostic. I am 99.9% in cash. My only position is a handful of Apple puts that I tried to sell at the close but didn’t get the trade in on time. If I had a book to talk, I would think harder, but since I don’t you’re on your own!

Yesterday, after the market closed, I posted in the comments:

“…the market will be looking for an excuse to sell-off. That excuse could be the unemployment-claims number tomorrow morning.”

And yet, I was caught by surprise by today’s unemployment-claims inspired sell-off! How did that happen? First, I wasn’t surprised by the number. I mean, who couldn’t see that coming? Every company in the USA seems to be laying off workers, except for Google, The Spending Monster, as Jim Cramer calls the company.

What got me by surprise was the sheer number of people who were surprised by the number. If you were one of those surprised people selling today, congratulations, you are an official member of the REALLY dumb money crowd.

So, today’s lessen is that there are billions, maybe trillions, of REALLY dumb money thrashing around in the market, and that my goal of becoming the world’s first trillionaire is doable.

The S&P 500 is short-term overbought, so I am looking for a correction soon; perhaps SPY will go down and test $126. However, if the market works off its overbought condition by going sideways on light volume, then I will consider going long.

The velocity of oil’s decline is slowing. The price declines are not as severe and the volume is not as strong, so it may be able to bounce in the next day or so. That could trigger the correction in stocks that I am looking for.

I will start Thursday with two positions: XLF puts and XLE puts. These two ETF’s should continue moving opposite of each other, so it is a paired trade. Ultimately, I should be able to make a profit on both positions. If oil catches a bounce, I will take profits on the XLF puts since XLF will fall. Then, when oil flops over again, I will take profits on the XLE puts since energy stocks have been tracking oil.

I feel good about the XLE puts. The XLE chart is in a well-defined downtrend channel.

I’m not so comfortable with the XLF puts. While the XLF is overbought and due for a correction, there are too many traders agreeing with me and trying to short financials. So, the trade is a bit crowded, and that is usually not a good sign.

In Bulls Load Cannons, which I posted two days before the giant rally on July 16th, I wrote:

“Bears should not be counting on the market to act rationally!”

And that still holds true. Just because the economy is weakening doesn’t mean that the market can’t rally. The March-to-May bear market rally was one of the longest such rallies in history. The market can do that sort of thing whenever it feels like it. Of course, eventually economic reality will re-assert itself. But until that time, it is important not to underestimate how far a bear-market rally can run.

Note: Watch the comments section as I will be posting my thoughts throughout the day Thursday.

Since there was so much war waged over the March low, both falling through it, and then bursting back above it, it is very likely that the market will fall back to test Tuesday’s breakout at some point during the next few days. So, how will you play it?

The textbook says that the first test should hold. So, I’m thinking that if SPY falls back to $126, and is oversold when it arrives there, then going long for a bounce will be the correct trade. It might feel scary, but the odds will make it a pretty safe trade.

Watch the comments, as I will be posting as I trade on Wednesday.

While Apple got the bulk of the attention on Monday, American Express dropped a major bomb on the market. Take a look at this post from Calculated Risk.

This recession just ain’t going away.

Debka reports that the US, UK, and France are preparing a naval blockade of Iran. Debka makes it look like Operation Brimstone is taking place in the Persian Gulf, but it is actually taking place in the USA. Nevertheless, it looks like a naval blockade will be the next step in the Iran conflict.

The big question for Tuesday is, will the QQQQ hold its low from July 15th; only a week ago. There was quite a lot of volume on that day, so there should be some support there. However, with the best-of-breed Google and Apple getting slaughtered, the group looks helpless.

By time the Q’s get to $43.30, they will be short-term over-sold. So, I’m thinking they bounce at the July 15 low, flop over and proceed to test the March low at $41. What do you think?

Note to readers: I didn’t have time to respond to many comments today, but I did read them all. The comments are very helpful to me, so keep them coming.

UPDATE: Oil plunged and helped stocks to reverse their plunge from last night. So, my prediction was spoiled. However, I traded through it very nicely and finished the day with a large profit. I took profits on my puts in the morning, and went long IWM and SPY calls in the afternoon.

It’s Sunday night and as I expected, the oil futures are up a bit, and the S&P 500 futures are down a bit. If oil can close even modestly higher on Monday, we will have a good test for this rally. If stocks get slapped around by oil, then that will be a piece of evidence that the rally lacks animal spirits.

I’m thinking about putting on an Apple short Monday; maybe half before the earnings report and half afterward. Apple is a great company which I’m sure will continue to do well, but that didn’t prevent its stock from plunging in January, and it will probably fall again as the recession rolls on. The chart is clearly rolling over, and the stock is hanging by a thread. The big institutions also seem to be dumping tech, so Apple looks like an attractive short play.

Watch the comments as I make updates throughout the day.

Now that the Iranians have nuked the Geneva talks, over-sold oil will almost certainly catch a bounce on Monday. The tidal wave of oil money that sparked last week’s rally in stocks will flow back into the commodities market, and the already over-bought, and starting-to-roll-over stock market will plunge. And since all the shorts have been squeezed out, there may not be anybody willing to step up and buy. We might finally get the big wash-out that everybody had been anticipating.

The June decline was orderly because shorts were constantly buying-to-cover and taking profits each time the market dipped. A huge number of those shorts were burned off last week. So now the market is free to plunge. At a minimum, last week’s low should be tested.

As oil fell on Friday, tech fell harder, and that is why I put on a large short-tech play Friday. So, if you want to buy some QQQQ put options in a panic on Monday, don’t worry, I’ve got some to sell to you!

And I’m not alone either. As Jon Najarian reported on “Fast Money” Friday night, a gorilla bought 144,000 September $42 QQQQ puts in one trade on Friday – a ginormous trade. So, somebody huge is making the same bet that I am. Now, I have no idea who this gorilla is, but suppose you were running a huge fund and you decided to rotate out of your tech stocks and into health-care stocks. You know that when you start selling your techs you will knock the market down because you are so huge. So, why not buy a few puts and profit from your own selling?

Note: If you are not an options trader, you can still see this QQQQ put position by logging into your broker’s website and then looking at the September options for QQQQ. You will see that the open interest in the $42 puts dwarfs all the other strikes.

I must say that I am surprised by what happened in Geneva. These diplomatic things are usually decided in advance, with the actual meeting just a choreographed formality. But, as I have been saying, the Iranian government’s actions are somewhat lacking in rationality.

So now, instead of having a nice deal, we have a two-week deadline for Iran to knuckle under, which they have already said they will not do.

With the meeting ended badly, maybe the Iranians will go back to testing missiles. And also potentially affecting oil is Tropical Storm Dolly which will enter the Gulf of Mexico as the market opens Monday morning.

The S&P 500 is at the March-low resistance, and the VIX has fallen to its uptrend line which has triggered a plunge in stocks each time it has been touched during the past two months.

So, it looks like a perfect market storm is brewing for Monday. Perhaps there will be some other news before Monday morning to offset these factors, but don’t count on a miraculous over-night recovery of the futures like we had Friday morning. That was just the options elves propping up the market to save their options positions. None of the big players have to buy on Monday.

Note: You may want to watch C-SPAN Sunday night. The interview with Shelia Bair will be aired at 6pm. This is the one that caused the big sell-off in stocks Friday before the close when CNBC reported that Bair was training up an army of regulators to handle more bank-runs. Oddly enough, I anticipated this a week ago:

“I wonder what the capacity of the FDIC is? For example, how many banks could they seize in a week? Are they staffing up? What about the Fed? Won’t Bernanke need a whole new army of people to oversee all the new stuff he will be responsible for? Let’s hope there’s a Bureaucrat Boot-Camp somewhere training up a battalion of babycrats to man the trenches before things slip out of control.”

It looks like that is exactly what is happening.

Update: I just watched the Bair interview on C-SPAN (which was also aired at 10am.) While she was confident that the FDIC could handle the problem, Bair did indeed say that she was “vigorously beefing up staff” (9 minutes in) and that there would be more bank failures (28 minutes in). The FDIC is also building a new computer system and requiring banks to interface with it so that seizures of failing banks can be done more quickly and efficiently. Bair also touched her nose several times during the interview, which is a “tell” that she thinks the situation stinks.

Note: While oil can catch a dead-cat bounce off of the Geneva news, falling oil is actually a recession signal. Consider this quote from Barrons:

“The last time oil fell by 2% or more on three consecutive days from its year’s highs was in September 2000, which marked the start of a rocky patch and a year-long decline.”

…and a two-year plunge for stocks!

Barring spectacular news in the morning, Thursday’s rally will be wiped out with a large gap down Friday morning. If you had to make a trade at the open, what would it be?

Do you think dip buyers will step up to get in on the miraculous “end of the bear market” as Larry Kudlow trumpeted on his show Thursday night?

How will options expiration and oil effect your decision?

You have to make a trade at or before 9:30am; somebody is holding a gun to your head! What will it be?