Bearish bets in the equity options market, coupled with an increasingly sour view from a technical perspective, suggest stocks will struggle to break from a vicious two-month downtrend this week.

With few catalysts on tap, it could be difficult for investors to find a reason to buy even as recent declines and a jobs report that did not confirm investors' worst fears present the opportunity for a short-term boost.

U.S. markets will be closed on Monday for Independence Day, and the holiday is expected to depress volume during the week, making equities more vulnerable to large swings following the worst week for the S&P 500 in two months.

Only about 30 percent of stocks are above their 200-day moving averages, so the vast majority are on a downtrend, said Frank Gretz, a market analyst at Shields & Co in New York.

The market needs to prove itself with a rally on strong volume, and that's going to be hard to get with the holiday and the bad news we've seen creating more pessimism.

Last week, the Dow fell 4.5 percent, the S&P lost 5 percent and the Nasdaq shed 5.9 percent.

Over the past couple of months, markets have been beset with a string of negative data showing weaker-than-expected retail sales, consumer confidence and plunging home sales. The data was capped by Friday's weak payrolls report.

BETTING ON DECLINES

Options activity on exchange-traded funds (ETF) that tracks the S&P 500 benchmark and the Nasdaq suggest that investors are betting on more declines.

The most actively traded options on the SPDR S&P 500 ETF are the July $100 puts, suggesting traders are hedging for potential losses, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio. The ETF slid 0.6 percent to $102.20.

Similar activity was spotted on the PowerShares QQQ Trust ETF which tracks the performance of the Nasdaq 100. The most active trades were on July $41, $40 puts. The ETF closed 0.3 percent lower at $42.47.

We are in a tremendously oversold situation, but that doesn't mean we can't sell further. Options activity shows that the bears are in control and that the trend will continue, Detrick said.

As of late Friday, 133.94 million shares traded on the SPDR S&P 500 fund, and on Thursday 382.92 million shares exchanged hands, the highest volume since May 21. The three-month average trading volume is 266.34 million shares.

When the volume is high on a down day like yesterday (Thursday) and (Friday), it confirms that this is a bear market and that the sellers will be in control.

The QQQ Trust ETF traded 46.19 million shares as of late Friday, but the volume reached 158.69 million on Thursday, compared to a three-month moving average of 103.50 million.

The June U.S. nonfarm payrolls report showed a fall in overall employment while private payrolls rose only slightly, a sign the recovery continues to struggle to gain traction.

But some analysts say the market's recent sharp declines and positive elements in Friday's unemployment report could give stocks a short-term boost.

STOCK BOUNCE POSSIBLE

Investors were worried that the report would show the economy melting down, and clearly that didn't happen, said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey.

The psychology was just too negative about the labor market and the economy in general, so we could be due for a bounce.

The S&P's 14-day relative strength index fell below 30 on Friday, indicating it could be oversold in the near-term. The Standard & Poor's 500 Index <.SPX> fell to 1,022.58 on Friday. The benchmark could find technical support near the 1,008-1,010 level, this year's low and also the 38.2 percent Fibonacci retracement of the advance from the low in early March 2009 to the high in April 2010.

One of the few indicators on tap for this week is June same-store sales, which many retailers will report on Thursday, giving insight into the state of consumer spending.

Consumers are very cautious right now, and we're not looking for much incremental growth at all, said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Co. in Greenville, Delaware.

Nyheim added that discount retailers could be among the few sectors to see improved sales as consumers trade down to lower-priced merchandise.

Discount retailer Family Dollar Stores Inc is scheduled to report quarterly results on Wednesday, the sole S&P 500 company to report this week. The third-quarter earnings reporting season begins in earnest with Alcoa Inc on July 12.

Family Dollar has seen some positive trends of late, and they've been picking up market share from other retailers, said John Massey, portfolio manager at SunAmerica Asset Management in Jersey City, New Jersey.

Despite the lack of scheduled reports, a number of companies could give guidance about earnings this week. John Butters, the director of U.S. earnings for Thomson Reuters, said that the week before the start of earnings season will be the time companies will come out and say, 'This is what we're going to do.'

As the earnings season nears, Butters noted that there were 1.2 negative company preannouncements for every one positive. Historically, the ratio has been two negatives for each positive.

Also on tap for this week is the Institute of Supply Management's services sector survey for June, which is expected to contract slightly from the previous month but still show expansion.

(Reporting by Ryan Vlastelica and Angela Moon; Additional reporting by Caroline Valetkevitch and Matthew Lynley; Editing by Kenneth Barry and Maureen Bavdek)

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