MBS CLOSE: Technical Trade Continues To Dominate
When you see the word "technical" in a title, it's likely to be a chart-heavy evening. That's not that there's nothing to talk about, simply that the pictures do most of the talking, and you know what they say about pictures...
First thing's first. To me on a visceral level, today FEELS a lot worse than it is. MBS were down early and often, resulting in a larger than normal bout of selling that left the 4.5 down 12 ticks at 100-22, plenty of negative movement for widespread reprices for the worse.
Let's step back a bit from the short term patterns though--Not because I want to pass out rose-colored glasses amidst price losses to somehow make you feel better about a red screen (although I love making you feel better)--in order to see today's movements for what they are, what they have been, and what they will continue to be until they're not any more: organic directionality confined to technical ranges. Ok, what does that mean?
"organic directionality" - in this context referring to the "of it's own accord" direction for MBS prices, whether that be a lot or a little. Econ data bullish for the recovery? Then ORGANICALLY, the suggested direction is weaker bonds. Greece is going bankrupt? Organic suggestion is a flight to quality bid benefiting bonds.
"confined to technical ranges" - technical price levels exist independently from the underlying fundamental data (in their purest sense). They generally earn their designation by being an obviously psychological figure (think 4.00% 10yr notes) or because they've done something in the past to suggest their future behavior. In other words, if MBS prices were to "bounce" again and again at 101-04 without going over (in a statistically significant way), then one might conclude there's "something about 101-04!"
And one would be right. 101-04 would be a technical price level. The interesting thing about technicals is that nothing need be known about the underlying security in order to observe these behaviors. Whether we're talking about pork bellies, MBS, or the current percentage of effort my wife expects me to devote to house-cleaning, 101-04 is the same technical indicator in all cases. It's all about that past performance and it's suggestion for future behavior (as far as house-cleaning effort, I can assure you I'm in a stable uptrend, even if my RSI, MACD, and sStoch indicate a potential bear reversal). Ahem... Moving on!
Oh, right! Pictures... 1000 words... Etc... Here ya go... All 3 of our starting line-up market sectors playing good technical ball today:
Busy chart... Sorry... I'll break it down.
- yellow circles are "higher lows" which allow us to connect the dots with the uptrend seen with the lower of the parallel white lines.
- Teal Circle --- a strongly held tenet of Technical Analysis (TA for short, should I choose to indulge the abbreviation hereinafter) is that an established trend, once broken, tends to take on an opposite role. "one man's ceiling is another man's floor" or however you want to think about it, once that lower white line was broken, we'd be looking for it to provide resistance and deter meaningful gains past that level. Mission accomplished white line, mission accomplished...
- Red lines - adding to the bearishness here is that the bounce of the "teal circle" resistance coincides with the red line at 101-03, which is quite deserving of technical notoriety, for capping everything the market threw at it in late Jan to early Feb and once broken even providing a textbook bounce in the opposite role of SUPPORT (vs. resistance). Logically then, since prices had fallen well through that level early to mid-month, there's a strong technical ceiling of resistance suggested by the combination of the horizontal 101-03 and the upwardly sloping white line where it intersects at 101-03. BAM is right....
- But the saving graces are twofold. First, we're not even testing the lower red line (yet) which contained the worse half of MBS prices since mid December. Additionally, you can plainly see the rarity of prices above 101-03 so far this year. So don't miss it too much. Finally, if we're not at 101-03, there's really only 100-28 before 100-19 is the next clearcut technical suggestion. So before a trade even occurred today, the technically devout could well have surmised the day's result.
Make sense? Let me know (PLEASE) in the comments... If it's too much, we'll pare it down. But don't want to leave you guys high and dry from an explanation standpoint. We have no way of knowing unless you tell us. Be harsh... We like it.
Moving on to Stocks and Bonds, we'll spend less time explaining today (since the general principles are covered in detail in the MBS discussion).
10yr Treasury
Simply put, a few strong horizontal technical levels suggested by previous reversals.3.75 is a pretty big deal as that's the highest we've been in yield since mid Jan. And those "high times" marked the worst yields seen in many many months. So a break there is the bearish risk, and only challenges ahead--first in getting back through 3.71, then 3.67 (not drawn on chart), then 3.63 (also absent), and getting meaningfully below 3.6 is about as likely as Greece getting approved for their Amex Black any time soon...
On to stocks...
Sorry for the complicated description that follows: That big line in the middle is 1100. That is all.
But seriously folks... Previously significant technicals broke down somewhat as stocks sold off in late Jan. Stepping up to the plate in their stead was the "always a threat" ROUND NUMBER LEVEL. You just never know, but always want to allow for the possibility that ROUND NUMBERS will serve a technical purpose. We're knockin' on that door starting tomorrow, and at the same time that tsy's might be knocking on that ceiling panel as rates try to move higher. That's not to say that WORSE is necessarily the direction for tomorrow and the week or so beyond, but considering Friday's Closing Commentary, maybe we are...