As we noted yesterday, we're expecting wider trading ranges following yesterday's big breakout. Although we did have nearly a 10bp range in 10yr yields (similar to the expectations created by the last example of such a breakout in October 2011), the volatility worked itself out surprisingly well and surprisingly early in the session. From 10am on, 10yr yields held a range of roughly 3bps and Fannie 3.5 MBS stayed inside a 7/32nds range.
(source: MBS Live)
Seeing MBS trade between just under 102 this morning and end up most frequently capped by 102-11 as the day progressed was very much in line with the 50% and 62% retracement levels from August. Origination was much lighter today than yesterday and we got the sense that MBS had their eyes on benchmarks, in panic mode in the morning as 10's traded into the 2.3's, and firming up against 102-06 support as 10's put more bricks in the ceiling at 2.285
To preserve the theme of 'putting bricks in the ceiling,' here are some dotted red lines that might sort of look like bricks at the aforementioned 2.285 level (referred to as 2.29 in the chart below). Between yesterday afternoon's bounces against this ceiling and today's FOUR solid pivot bounces (once on the way down from the morning highs and then 3 throughout the rest of the day, using the line as a ceiling of support). But other than just looking like a good pivot point for the past two days, and other than that pivot point getting several bounces in extremely high volume, why else would we care?
In that sense, recent trading levels look like very measured and calculated moves. Now... of course we know that there was not a consensus on this eventuality. The snowball had been a perennial "might happen" sort of thing, but few if any knew exactly when it would start rolling. Once it was rolling, however, this notion of "somewhere around 2.30" was a fairly logical upper limit, even if it was not pleasant for rate watchers.
Tomorrow is probably going to be pretty important, especially for a Friday. If we get another day of "ground-holding" under the supportive levels of the past two session, it bodes well (or at least it "bodes better") for further support next week. There are many ways to look at the market from a technical perspective, but one of the interesting ones that jumps out today to anyone who enjoys memorizing candlestick patterns would be the potential formation of an "Evening Star" in the daily candlestick chart for 10yr yields. Stockcharts.com defines it like this:
The evening star consists of three candlesticks:
- A long [ascending] candlestick.
- A small [asending] or [descending] candlestick that gaps above the close (body) of the previous candlestick. This candlestick can also be a doji, in which case the pattern would be a evening doji star.
- A long [descending] candlestick. The long [ascending] candlestick confirms that [selling] pressure remains strong and the trend is up. When the second candlestick gaps up, it provides further evidence of residual [selling] pressure. However, the advance ceases or slows significantly after the gap and a small candlestick forms, indicating indecision and a possible reversal of trend. If the small candlestick is a doji, the chances of a reversal increase. The third long [descending] candlestick provides confirmation of the reversal.
Here it is on our chart with a few past examples highlighted. We also included the inverse version of the pattern (morning star, or morning doji star), in the mid-January rectangle, just to show another good example. As you see the past examples all have the 3rd ingredient in the form of a long-ish candle taking yields back in the other direction. If the question mark I inserted in the chart below ends up looking similar, it would edify a potential supportive bounce. Keep in mind, however, that could mean that recent highs are merely likely to act as one end of a volatile range that doesn't necessarily move back to levels from the previous range under 2.13. At this point, we'll take what we can get though...
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