With last week's FOMC Minutes out of the way on Tuesday, markets shifted gears into the last 3 days of the week--more interested in domestic economic data and headlines.  Despite the shortened trading day and illiquid conditions, Friday offered the most anticipated and most surprising piece of economic data. Non-Farm Payrolls--widely regarded as the single most important line-item of domestic economic data--were drastically lower-than-expected, sending bond markets into rally mode early.  

Friday's rally left bond markets in a rich technical environment, right in the midst of several well-traveled and historically significant technical levels, trends, and ranges.  What does that mean exactly?  

When we say "rich technical environment," we're talking about one of the several approaches to market analysis that we're almost always using and combining.  To oversimplify, we might say there's a spectrum with "technical analysis" on one end and "fundamental analysis" on the other.  The "stuff that happens" (economic data, news, auctions, etc...) would inform the fundamental side while technical analysis (in its purest form anyway) is concerned solely with prices, yields, volumes, and all the other quantitative measurements of a security's trading levels.  

In other words, fundamentalists would care more about the stuff that happens while technicians would care more about the charts.  Few market watchers ascribe 100% to one end of that spectrum, and we're no different.  It seems to make the most sense to have a balanced approach, adjusting the broader mix of technicals and fundamentals as well as their various sub-components.  

For instance, in the broad category of technical analysis there are about as many sub-components as your mathematical imagination could create.  Take the price of Fannie 3.5 MBS for example.  You could average that price out over 100 seconds, 100 minutes, or 100 days.  You could give more recent trading more weight.  You could apply Fibonacci retracement levels to the highs and lows, plug the numbers into hundreds of different technical frameworks with weird names like MAC-D Forests, Ichimoku Clouds, Elliot Wave Analysis, RSI, Stochastics, and more, or you could simply draw a straight line on the chart--horizontally or diagonally--and make a case that it means something.  

Particularly with respect to those "straight lines," that is where we see current trading levels in a "rich technical environment."  We can look at the past 5 months or so of trading in both MBS and Treasuries and see that trading levels are near several longer term inflection/pivot points.  Pivot points are price (or yield) levels that can act and have acted as both floors and ceilings to a greater extent than other levels.  As such, you could also say a pivot point is less likely to be crossed than a non-pivot point, regardless of which side prices are approaching from.

Depending on whether we're looking at the short or long term, these can be precise levels or slightly wider ranges.  For instance, 10yr yields have a a long term pivot range that lies from roughly 2.07-2.13%.  This is the pivot that was broken on 3/13/12 after having held since 11/1/11.  Friday's rally brings yields just under this pivot point again for the first time since then.  Remember the "college student analogy?"  Basically, Friday's trading makes it look like he might be moving back home after all.

It's not too big of a leap to mix that technical approach with a fundamental one.  It would be as easy as saying that this decision making process (to trade under 2.07-ish in 10yr yields or to bounce back higher) will be informed by the week of data and events that lie ahead.  Of particular interest this week is the auction cycle as it includes 10yr notes and 30yr bonds.  Interestingly enough, the high yield awarded at the last 10yr auction was 2.076, right at that key pivot point between the past 5 months and the last 4 weeks (also interesting that it occurred 1 hour before the FOMC announcement that took yields much higher).  It's almost as if the market will begin deciding this week as to whether or not the past 4 weeks were just a fluke or sign of things to come.