Stock markets closed lower for the week, pulling back sharply from record high levels after monthly employment data showed that weakness is still a central feature of the economy.  Friday’s Non Farm Payrolls came in at a tepid rise of 88,000 jobs for the month, much lower than the 198,000 initially expected by economists and worse than the 236,000 rise during the previous month.  These figures were accompanied by a rise in the Unemployment Rate (to 7.8%).  Those watching macro releases this week were not altogether surprised by these negative numbers given precursors seen earlier during the week.  Specifically, the ISM non-manufacturing survey came in at 54.1 (where 55.5 was expected), and the significance of the release comes from the fact that 70% of the US economy is devoted to the services sector.

Additionally, Wednesday’s ADP report showed that 158,000 jobs were added to the private sector during the same period.   While measuring different data, the ADP is generally viewed by traders as an early indicator of what to expect in the Non Farm Payrolls data (always released on the Friday of the same week), and this time the correlation held up in predicting the declining figures.  This should be viewed in conjunction with the other main event of the week, the new quantitative easing program announced by the Bank of Japan.  Japan revealed its intention to buy government bonds in amounts equal to roughly 10% of GDP, which is a larger proportion than the programs implemented by the US Federal Reserve.  Together, these events will likely drag on investor sentiment as most of the evidence points to a global economic recovery that is sluggish at best.  At this stage, it looks like we are one negative European debt story from posting major stock declines in the benchmark indices.  So, it will not take much at this stage to reverse the previous optimism seen when setting all-time highs in the S&P, and any major reversals here will lead many to question whether or not this year’s rally was based on real economic progress.

Chart Perspective

S&P 500: 

The S&P 500 has dropped sharply after breaking the uptrend channel that began in the middle of March.  Prices are attempting to bounce off of the 38.2% Fib retracement of the rally from 1480 (now at 1535), and this is the next major level of support.  A downside break here targets 1515 as the next short term level for bearish traders next week.  In order to reverse the bias, we will need to see a break of resistance at 1555, and if this occurs the next upside target is found at the all-time highs.

Dow Jones:

The Dow is attempting a bounce of its own but for the next few sessions, we will need to see a break of Fib resistance at 14,520 before the bias turns positive.  To the downside, expect a break of 14,350 to generate fresh bearish momentum.