MBS CLOSE: Bad Technical Moon On The Rise

By: Matthew Graham •

It hasn't received as much air time these days, but the range trade and technical price levels are still very much in play.  That has to do with the slightly less paradoxical directionality these days.  Markets have tended to move in the direction suggested by data to a much greater extent than the summer months that saw the release of our hit single "Day Trader's Paradise..."

Mortgages started off the day significantly weaker to tsy but rallied a lot harder into the noon hour.  The highs of the day coincided with the upper limit of the trend channel we've been riding all week.  After bouncing shortly thereafter at 101-27, weakness ensued through the close but never managing to bring prices below this AM's lows or yesterday's lows.  In fact, we're only 2 ticks off Monday's lows...  Meanwhile, you can see the highs grinding lower. MBS have been pretty stable in that regard as tsy's succumb to greater chopatility

The white circles show the trend supporting lower yields, but presto chango with today's breakout and one man's ceiling is another man's floor.  In other words, this is an INTERNAL TRENDLINE that may prove to be resistance for tsy's tomorrow.  The one potential saving grace for this sort of reversal is the downward slope.  There's no default technical suggestion that yields move higher from here, merely that the previous trend of lower yields is over (assuming the breakout stands confirmed by Friday).

But in tsy futures, there is quite a bit of a technical suggestion, and it's not a good one. So what follows is an attempt to do a "zoom effect" which will show you the long term chart of futures in the background with only the last 3 days magnified in the foreground...

That work?  No?  Oh well, I ain't stoppin'...

So not only have prices failed to break 119-29 even on an intraday level since May, but they've had 3 very similar runs at it...  All starting around 117 and all  the "tests" were preceded by large rallies the day before.  But ours from this week looks nicer right?  To make matters worse on the technical side, we have bullish reversal signals from the candlestick pattern: TWO of them. 

We discussed the "hanging man" last week and said it needed "confirmation" before taking on greater significance.  And though it barely makes the grade, yesterday's candle meets the criteria to be considered a "hanging man."  Therefore, today's losses act as confirmation.  The sages of candlestick wisdom often point out on these patterns that "require confirmation" that if the following trading day not only confirms the previous "maybe," but also creates one or more additional patterns, their predictive powers increase. 

That being the case, let's forget the solitary candle "hanging man" definition and look at all three.  Depending on who you ask, that is a decent example of the "evening star" formation (though the purists would argue the center candle must "gap" above the first...).  It's also "dark cloud cover" due to today's candle being solid and completely covering the open and close from yesterday.  There are yet more candle formations we could makes cases to squeeze this into, but the moral of the story is that they're all bearish. 

So.....  if you weren't feeling bearish before, and have been wondering what all the fuss is about a "lock bias," maybe it's time to add a little bear to your diet?  A caveat though: it's important to note these are just a few technical studies applied to only a few pieces of a complex and interconnected market.  To make lock and float decisions based on this stuff alone would be pretty silly, but maybe if you add in the other couple thousand words a day we write and the 4-12 hours a day you spend originating, maybe, JUST MAYBE, your individual stance on your pipeline is slightly more certain... 

For AQ and I, we're probably more bearish at these highs than you're going to want to be (depending on who you are of course).  And while that never means rates are necessarily getting worse on any given day, it usually does mean that we're thinkin' about cashing in on the ridiculous gains we've had since the beginning of the month...  But I guess we said that already, so the last thing to consider (and something we'll probably revisit periodically to see how the old girl is holding up) is the long term charts with the same trendlines from Monday's close.  There's no analysis or suggestions to go along with them (lest it prompt another Van Guilderism...), but I just find that staring at the long term charts helps me synthesize my lock/float thoughts and emotions when I'm originating, usually even more than the nitty gritty day to day stuff...

TOMORROW:

  • Jobless Claims
  • Leading Indicators
  • Philly Fed
  • 2's 5's and 7's tsy auction announcements
  • Money Supply
  • Fed Balance sheet including weekly MBS purchases
  • And Fed's Fisher as the day ends...