MBS AFTERNOON: Closer Look At Pivot Points

By: Matthew Graham •
  • MBS rallied steadily from 10am to 2pm with 4.5's up to 101-08
  • That coincided with 10yr breaking into 3.5's and was apparently the profit-taking cue
  • MBS fell near the lows of the day to 101-02 and 10yr tsy yield rose to 3.615.
  • Both have since corrected (MBS back over 101-04, 10y at 3.605) and continue in a narrow range
  • Still an "inside day" for both sides of market to kick off NFP week
  • Limited data tomorrow

The treasury portion of the chart above is a great example of a term we use quite often.  So in the context of that chart, let's make sure we're all on the same page.

Plain and Simple:

  • PIVOT POINT, PIVOT, INFLECTION, and INTERNAL TRENDLINE are all terms that refer to the same phenomenon.  
  • To understand these, first we need to define "highs" and "lows."  To this end, we'll simply define a "high" as this will necessarily imply the definition of a "low"
  • Let's keep this totally simple...  "Highs" are points on a plot line that are higher than adjacent points.  "all the little mountains," whether big or small. 
  • You could have tons and tons of highs in succession.  As long as that line was lower immediately before and immediately after a particular point, it's a high.
  • A PIVOT POINT then is level on the y axis where we see a far greater tendency for the plot line to make either highs or lows as opposed to passing through that level. 
  • Bottom line, in simple terms, "If you can draw an imaginary line across a chart that touches more highs and lows than any other imaginary line, that's an internal trendline.  If the internal trendline is flat, that's a pivot point, inflection point, or simply, pivot. 

Does that make sense? 

Anyway, it seemed worth mentioning today that pivot points can be followed as significant for any length of time.  Long term pivot points might look at the daily high this month versus a daily low from last month that occurred at the same price level.  But for the treasury chart above, the white circles show multiple highs and lows occurring at the 3.615 level. 

And the whole reason to even be interested in such things is that when these sorts of pivot points emerge, even on this short timescale, WE DON'T EVEN NEED to ascribe any fundamental significance to 3.615 if we can see that YIELDS TEND TO EITHER MAKE A HIGH OR LOW AT 3.15 AS OPPOSED TO MOVING STRAIGHT THROUGH. 

Therefor, these kinds of pivot points add to our amount of informative data on any given day BECAUSE we know that if they're decidedly broken, the yield would be less likely to correct back to the other side of the line. 

It all goes back to the notion of "trendlines are like tripwires."  When they're tripped, vigilance increases.  As far as 3.615, no "trippage" at the moment.  And considering yields are LOWER than that tripwire, that's a good thing.  We'll let you know if that changes between now and day's end, but even if it does, it's not likely to mean much during the illiquid and thinly traded final hours of the day.