Friday MBS Rally Gives Pause To Interest Rate Pessimism

• Bond Bulls were outcasts this week
• Stocks No Gems Either as Risk in general took a vacay
• MBS up 8 ticks at 100-12, Tsy's cross the 3pm marking period smack dab on 3.85
• Could it turn out to have been bond market's big bluff of 2010?
  

If you missed the last few posts discussing the importance of 3.85, The last post is a good refresher. Knowing that, Rawe did indeed hit that mark when 3pm rolled around.

We can see action around a 100-10 pivot point in MBS.  If we open up north of that on Monday, that looks like as good a lock trigger as any at the moment.  On the bottom half of the chart, we see treasuries fighting with, and ultimately breaking 3.85, but potentially meeting further resistance from a gently sloped trendline forming from interday lows (teal line). 

The bigger question from a strategy standpoint is "what did this week mean long term?  And what does it imply going forward?"

If we look at daily charts, things are a bit more bearish than the weekly chart.  The daily chart shows that we are definitively out of the recent triangle on the ugly side (teal line).

But going with the purely horizontal level at 3.85, we're still in the game as we shook off the TEST of that breakout.  Moving from daily to weekly, we'll take another look at that line in a slightly more bullish context:

In this context, it just looks like another instance of poking at the range highs and more likely to correct lower in yield.  Whether it does or not, we can't predict, but the probability would be against that happening if we were to close higher than 3.85 today.  MBS on the other hand are "coiling" with narrowing trends, and for sure, are likely to break out to the low side of that triangle when they break out meaningfully.  The only saving grace here would be some seriously awful counterpoint to the recovery or some surprise out of a Fed-type buy side entity. 

And yes, that means that bonds are still more likely to move over 3.85 in the longer term, but it leaves enough room for the possibility that we could catch a break in the short term.  Then of course if the sky falls, we could even catch a break in the long term, but we're not holding our breath until we see those pieces of sky start falling. 

One major solace is the weekly stock close.  You may remember a ton of attention paid to 1166 recently?  That's been a big pivot in the past two weeks, and happens to be exactly where we closed.  No coincidence in my opinion, and basically leaving it up to next week's action to decide if stocks move lower while bond prices move higher (even if it's only for a week!), or vice versa.  Anything can always happen, but given the epic technical level fence-sitting in both stocks and the 10yr, it seems that the "you go this way and I'll go that way" scenario is more likely to play out than not."