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.