I think Friday's close caused more confusion than clarity. The concept of technical price levels being more informative in HINDSIGHT may be the culprit. That, and the fact that there were a few lines in the chart that seemed to be pointing toward "something." But today's price action is exactly the reason that the time was right to discuss the two epic and competing trends. Here's the chart from Friday's close:
And here are some thoughts with respect to the upper trend on Friday:
"whether or not it actually holds concrete-firm, the more important component of my revelation is that it "feels" like an appropriately sloped suggestion of the gradual and volatile path of the rate market's return to something a bit more historically average (eventually!). And as I so often point out, trendlines say MORE about the market in RETROSPECT. In other words, I don't rule out the possibility of breaking that trendline... Merely that such an occurrence would seem "significant" to me.
The notion that the economy will someday be better off than it is today shouldn't be a hard one to accept. So much money has fled to the sidelines and has been gradually returning as layers of fear and risk are peeled away from the macro-economic outlook. The SLOPE is suggested solely as a plausible desuetude of that fear and risk. The extremely flat nature of the slope means that there's plenty of room for economic bearishness and bond bullishness... But it's what prices actually DO versus this line that is far more significant than what they HAVE DONE.
That's why the "retrospect" point is on the table; so that if the trend holds it will be edified slightly more each time prices come close but fail to break through... But if either trend is broken, because of how the line has behaved in the past (retrospect!), that breakout would speak to a potential shift in long term sentiment. Because both trends are sloped, they'll necessarily be broken at some point, but perhaps too far in the future to be significant. So the sooner and more convincingly one is broken, the greater the suggestion for a shift in trend. With that in mind, let's take a look at the same chart with the additional data from today's trading...
MBS's 4 tick rally today brought prices to the exact level of the trendline. Whether they rallied or not, prices were close enough to the trend on Friday that it was time to get out our notepads and watches in order to record their behavior, hence the reason I brought it up when I did. A bit of the uncertainty I gleaned from questions suggests that the downward slope of the resistance line confused the message in that it seemed to some like a suggestion of impending price weakness.
Know this: we will almost never make a "prediction" about what the rates market is or isn't going to do in the short term. All anyone can do is assess the data and make incremental shifts in their pipeline allocations according to "the case" that different interpretations of the data make about future potential. It might be some sort of romantic ideal to say "I called it!" but it's not usually a profitable one... Moreover, the repeated references to the common sense involved in the assumption that rates would not be in the 4% range forever were to let you know that my analysis was discussing a TECHNICAL FRAMEWORK AGAINST WHICH WE COULD ASSESS PRICE MOVEMENTS.
So bottom line, if it's not already apparent by the 4 tick rally in MBS today, I wanted to discuss our rapid approach to the broadest, flattest, and most outlying trends, and suggest that we might learn something from seeing how they react when and if those trend levels are reached. I don't want to open such cans of worms in the future if it causes more confusion than clarity, so I need some feedback as to how much sense this is making for you, please and thank you...
Moving on...
Though we are not yet privy to very much "reaction," prices did in fact reach the upper trend level today. We've set forth a few guidelines in the past for analyzing price behavior around trend levels... As for now, our subjective rules for a confirmed shift in trend would be to see prices move at least 3 ticks to the other side of a trendline and close above the trendline for at least 3 days... Since today does not get us to that "three ticks through" guideline, we're not evaluating a breakout yet, but we're close (and again, we were close on Friday, which is why it was time to discuss...).
Zooming in to the shorter term, intraday movements gave somewhat conflicting signals about the longer term levels. In other words, if we were watching for something to happen around 102-00 on the 4.5 today (which, again, was the suggestion of Friday's chart), we indeed would have seen what we thought was something significant happening toward the end of the day. Price strength began to fade and even fell off a bit just before the official close. But it's rebound to 100-28 cast the overhead resistance in a small bit of doubt.
One might not assign much significance to that rebound as it occurs after much of the activity has died down for the day, but even the tail end of tight band of trading around those 102-00 levels would be subject to the same problem. So there's no safe way to infer that MBS went out on an upswing that may continue into tomorrow as opposed to going out after showing the first signs of topping out...
Tsy futures cast a bullish vote from a day over day perspective as the previously discussed inverse head and shoulders breakout was more or less confirmed today.
Futures originally tested the neckline with a breakout and close above it on Wednesday. But retests on the following two days left some doubt as prices were unable to meaningfully break free of the neckline until today. To some, this is a bullish indication. Others don't much care. Yet others might care more that intraday prices topped out exactly at the highest closing level in October... Whichever direction they ultimately move notwithstanding, these conflicting signals are an understandable accompaniment to MBS's perch squarely on the fence.
The nice thing about this fence is that the bad side could still be pretty good... In other words, even if the test of the long term trend fails and we find ourselves with slightly lower MBS prices at some point this week, they wouldn't have to be much lower in order for the trend to preserve it's significance. Not only that, but the trend would have another notch in it's belt regarding said significance (more important in retrospect?).
Plenty Of Data Tomorrow
- PPI at 830
- Treasury International Capital at 900
- Industrial Production at 915
- Fed's Lacker at 10am
- A few bill auctions at 1130am
- And the Housing Market Index at 1pm
MBS Market Alerts
