How to trade Friday's job report in a 'bad-news-is-good-news mode.'

With Federal Reserve Chair Powell reaffirming plans to keep raising interest rates to bring down inflation despite the risk of recession during his speech at Jackson Hole, Friday's monthly U.S. jobs report may once again carry risks for the stock market.

The report could play a key role in the Federal's deliberations over its next monetary policy moveand how the market will perform in the following days.

If employment results come in "too hot" with August nonfarm payrolls rising more than 350,000 and the August unemployment rate falling below 3.5%, stocks would drop sharply in what might be a "less-intense repeat" of last Friday, as markets price in higher interest rates for longer, according to Tom Essaye, a former Merrill Lynch trader and the founder of the Sevens Report newsletter.

On the other hand, if job growth falls in a range of zero to 300,000 while the unemployment rate rises above 3.7%, the stock market may expect a modest rally given the drop in stocks over the past five days, say to Essaye.

In the worst-case scenario, with a negative jobs print for August and a spike in the unemployment rate, stocks may jump on a "bad is good" mindset though the Fed won't pivot away from its monetary tightening as "a soft number won't change the Fed's calculus for the next several meetings — 'we're still getting 50-75 bps in September', so we would not be inclined to chase that rally," according to Essaye.