Well...if there is one thing I can say about today' session...it would be: DONT FORGET ABOUT TODAY'S SESSION!

I earmarked my trade journal and highlighted the important observations I made throughout the course of the trading day....one of which was heavy heavy HEAVY trade flows. The yellow box in the matrix below is trading volume on the March 10 yr TSY contract.

Over a million contracts is strong volume in 10s. Look how trading flows picked up as the week progressed.

Here is the bad part...volume was increasing INTO THE SELL OFF. There are now TWO firm levels of resistance above the market ...118-00 and 118-20. We gotta break 3.46% before we even start thinking about a re-test of 3.38%.

Another observation that intrigues me, throwing in next week's Treasury auctions ($40bn 3s, $21bn 10s, $13bn 30s), is that fact that we went from one side of the range, paused in the middle, and continued higher, all the way to the other side...in a VERY short time frame, without stopping to test any pivot points. READ MORE

While a portion of this was the unwinding of Dubai "flight to safety" positions, the trip from 3.37 to 3.50 ignored several technical price levels. Rightfully so given the extent to which the labor market "improved" in November.

I say "improved" because I don't buy it. I am fading this all the way. We have been on board with the idea that the pace of job losses was beginning to moderate, I even reminded of that in yesterday's Productivity commentary...I also reminded that job creation was a much bigger concern than continued job losses at this point. I dont want to imply we've lost all the jobs we could possibly lose, but I do want to point out that we can only lose so many jobs! Especially with government interventions,  incentives, and initiatives still propping up the economy.  More or less...I dont think this is the beginning of the end of the crisis. I am still 100% on board with the notion that the recovery process is going to be LONG and SLOW. STAGNATION is an appropriate description.

All the noise about the Fed raising interest rates...I don't buy into that either. Again...I view the November NFP report as a sign of stabilization. NOT RECOVERY.

I would be willing to trade that idea too.Well at least I would be willing to tell you that's what I was trading. It's really nothing more than a source of justification in my opinion though.

WHY?

PLAY THE RANGE UNTIL THE RANGE PLAYS YOU!!!

We said it in June and have stuck with it into December....no way we ignore it now.

This should make for an interesting retracement once we head back  towards the middle of the range. All the normal pivot points that should have been tested on the way back up in the range, were completely blown through in a matter of seconds. It was like the market knew where it wanted to go and didn't need to stop for directions.Think of it as the exact opposite of a flight to safety rally. This means maybe we head back just as fast?

No. The data still demands respect. We will likely see one of two things...

1. While many will view today's NFP data as an outlier event, similar to Dubai (that's how I view it), the data was far too strong too completely ignore. This implies we should expect a slow/steady  reversal/retracement...back to the middle of the range. This idea is supported by year end as traders are looking to dress up their P&L by focusing their strategies on churning  profits via the range trade.(That has been the strategy all year! Its a trader's world, we're just living in it!)

OR,

2. We go higher. Much Higher. But that would imply the RECOVERY WAS UPON US...2s would have to sell off to push 10s higher. If 2s didnt sell and 10s moved higher...the curve would be prime for bargain buying aka "borrow short/lend long" strategies.

I shared my thoughts on why this is unlikely in the comments above. In terms of the big picture...I need evidence of a RECOVERY, not more talk of stabilization. We all know that the Fed's QE actions stabilized the banking system, but that doesn't change the fact that 16.4% of able Americans are jobless (U-6 unemployment rate). On top of that,  our economy is innovating, inventing, and implementing new technology that will make the production process much more efficient. This does not bode well for a large portion of our labor force. If you are an out of work American...go back to school. RETOOL AND RE-EDUCATE ...the labor market is getting more and more competitive.

(I don't rule out the market testing 3.57% and maybe even 3.62% before returning to the range)

So...I am sticking to my strategy heading into year end. PLAY THE RANGE UNTIL THE RANGE PLAYS YOU.

Given the fact that the Fed supported, low supply MBS market is a very popular source of year end window dressing allocation...rate sheet rebate should remain range bound too.

ps...I am not so confident heading into 2010