Answer and Explanation:
The Chief thinks McMurphy is in a hole because he's stepping into the water. The Chief is in the background while McMurphy is talking to a lifeguard at the edge of the pool, but in the meantime, the height difference between the Chief and McMurphy is different, and he is the only one who is, in fact, having to tread water, which makes Chief think he's in a hole. This idea came about because at that moment chief is in greater control of his mind, allowing him to develop reflections and thoughts about what is happening around him.