If you were here yesterday, then consider yourself excused from today... Although it would have been nice to know this before you came in I suppose... Reason being? Take a look at the price action on the day versus yesterday. Both days saw prices drop precipitously in the early AM and then travel sideways along resistance into the afternoon. Yesterday it was PAR-ish levels whereas today it's the trendline we discussed earlier in the day... How well did that line hold up as support? Good enough that one might almost be willing to come to the conclusion that technicals do indeed have a dominant presence in the market these days...
OK, so we can see that MBS prices have adhered nicely to a line drawn long ago... What is the significance of that assuming I'm probably going to tell you prices could go either way anyway?
Brief Foray Into Deeper Levels Of Trend And Technical Analysis
Yes, I know that all too often it must seem like we are keeping you up to speed on resistance and ranges when you might prefer that we simply made odds on what is about to happen. But like it or not, we are committed to being purveyors of "fishing lessons" as opposed to simple fishmongers... There is a lot of great reading out there on technical analysis and the even more basic concepts of trend pioneered by Charles Dow over a century ago. It's amazing that so many of those seemingly ancient ideas still provide the foundation for much of the more esoteric analysis being conducted today, or rather, it speaks to their timelessness...
Today, we'll talk about only a few of the concepts of "trend." One of the aspects of our jobs that is extremely easy to do, but incredibly difficult to do well is the simple task of identifying trends. Trends can be singular lines, ranges, triangles, general directions, oscillations, horiztonal price levels, widening ranges, etc... It can be very easy to identify a trend of "higher lows" for instance, when all one has to do is simply "connect the dots" that tie together as many successive highs or lows as possible. You can see that this is all we have done in the following chart:
Uptrend was unclear in June folloing the first major low after Black Wednesday. At that time, we began discussing other trends relating to slightly more complicated theories which we will save for another piece. But once we had the low in mid July, we could then began to track higher lows based on extending a straight line beginning with the connection of those two lows. Shortly thereafter, there were two more tests of the trend. And of course we can see that the line ultimately holds up through today, even acting as intraday support.
BUT THIS IS NOT ALWAYS THE CASE! That's why we mentioned earlier that it's not always as simple as connecting the dots... There is always the plethora of intraday movement to consider. Sometimes it makes more sense or yields a more clearcut technical picture to examine OHLC bars or candlesticks in order to draw trend off the day's total range. This is why you might sometimes here us say that although we've fallen below a particular trend, it won't become super significant unless closing prices hold that level. Whatever the case, the line was drawn and the line has held up through today, even providing intraday support. Several of you contact us on days like today when we draw a magic line in the AM that turns out to support prices all day long accusing us of all manner of voodoo and trickery, or asking us for the secret magic we're using to look at the markets...
So here's a big secret as far as the ostensible crystal ball is concerned... The fact that prices continue to hold above this trendline is not important at all in terms of predicting the future... Unfortunately, that is not the primary benefit of this type of analysis. Much more important than any predictive value these technicals have is their role as a sort of "trip wire." In other words, LINES SUCH AS THESE TAKE ON THEIR GREATEST IMPORTANCE WHEN, AFTER A SIGNIFICANT AMOUNT OF ESTABLISHMENT, THEY ARE BROKEN!
In other words, the more bounces caused by this line, the more potentially significant it becomes. But only when prices break through the line by a nominally significant amount (say 2-5 ticks?) and convincingly hold the trend that broke them through in the first place, does the line truly become important to our analysis. It's at THAT point that we can more reliably identify a shift in the trend. Discussing that shift in trend is almost always a higher probability proposition than discussing the continued strength of a support line. Remember, fixed income securities are not like stocks that have the ability to rise meteorically for years on end. They undergo inherent vascillations, thus adding even more credence to the CROSSING of trendlines as opposed to their predictive value for ongoing support.
Most basically, horizontal levels in fixed income securities are destined to be broken at some point. Likewise, ascending lines are even more likely to be broken if they are currently acting as floors. So the task then becomes to identify the most important trendlines and WATCH FOR THE BREAK.
Back to your regularly scheduled programming...
And so it is we come to rest exactly on the floor of our only uptrend since the dark times--and the longest term uptrend to boot. With a supercharged data day and week ahead, fingers will be crossed that we don't break on the downside. Remember, if we do, and if the break isn't severe, don't assume it's a shift in trend unless we get additional weakness (confirmation) on Thursday. So if you weren't waiting with bated breath for tomorrow's data, maybe you are now?
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