Friday turned into a big disappointment for the bulls when nonfarm payrolls added just 80,000 jobs following an optimistic ADP report on Thursday that gave false hope for a big increase of 90,000 jobs. The ECB admitted that the economic picture in Europe is looking worse but did little to counter the trend. And the chances of the Fed initiating QE3 dimmed as well, since the jobs number was not so bad as to force the Fed into action.

As a result, the Dow Jones Industrial Average fell 124 points to 12,772 on Friday, the S&P 500 lost 13 points at 1,355, and the Nasdaq fell 39 points to close at 2,937. The NYSE traded 596 million shares and the Nasdaq crossed 383 million. Decliners outpaced advancers by about 2.3-to-1 on both exchanges. For the week, the Dow lost 0.8%, the S&P 500 fell 0.5%, and the Nasdaq rose 0.1%.

The S&P 500 currently is trading in a recovery channel with support at the conjunction of its 20-day and 50-day moving averages at 1,340, and then the bottom of the channel at 1,320. Resistance is at the July high of 1,375, which coincides with the bearish resistance line drawn from the closing highs of April 2 and May 1. There is minor resistance at the April low of 1,357.

Friday’s pullback on low volume still has the bulls in charge of the recovery, but the loss of momentum is serious, and unless they can mount a full-fledged, high-volume attack, the current run is likely to fail.

The current recovery channel is much like last summer’s channel, though with much less volatility. And there are other similarities between last year’s and this year’s charts. Note the triple-top on both that preceded a decline. Last year’s decline was resolved with a bull-channel breakout. The S&P 500 is currently in a bull channel that has not yet been resolved. Also, there was a sell-off spike in late September that mirrors the spike down in early June accompanied by wild swings of the stochastic.

However, there is a major difference between the patterns, and that is elapsed time. Last year’s overall pattern took almost 10 months to develop, while this year’s could be resolved more quickly. I suspect that a break to new highs will be preceded by a test of the 200-day moving average at just above 1,300.

Conclusion: On Friday, I said, “Before we jump in with both feet, we must consider the impact of the report. If it’s too high, the Fed is likely to provide more stimulus. But if they are relatively ‘as expected,’ look for a pullback to the major support zones.”

Friday was the first trading day since the recent breakout of the major indices, and traders were confused by the lower, but not too low unemployment number. They wonder if it is enough to jostle the Fed to action. Thus, stocks closed down on very low volume.

Although the purpose of the Daily Market Outlook is to review markets from the perspective of technical analysis, when the technical picture appears positive and the world’s economies appear in trouble that it is worth consideration.

Here is the ugly truth: The ISM manufacturing index for June was 49.7, down from 53.5 in May, which was significantly below the forecasts and the worst since July 2009. The ISM services index dropped to 52.1, the lowest since January 2010, when the Dow was at approximately 10,100.

The China HSBC services purchasing managers index (PMI) fell to a seven-month low in June, and in the 17-nation bloc of the EU, the jobless rate hit 11.1%, which is the highest reading since 1995. (Thanks to Timothy Hughes of The Price Futures Group for the economic numbers.)

And on Friday, Spanish bonds were back over 7% — an untenable long-term rate.

However, the market is positive in the face of bad news, and that’s a positive that may be telling us that the Fed along with the European banks will ease again, soon kicking off the traditional election-year rally.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.