MBS Extend Gains. TSY Short Sellers Ready to Battle Real Money Buyers

We stand a reasonable chance of confirming the rally that began around mid-day yesterday.  Bonds have added to those gains this morning but positive progress isn't getting far ahead of itself just yet....

Rather than a simple directional reversal, MBS prices and treasury yields are holding just above support levels that were crested overnight.  In fact there are several layers of support ranging from super short to super long-term which we'll look at momentarily.  If demand is strong enough from real money accounts to overwhelm the expected push from fast$ short sellers, we could see the opposite of  "snowball selling" to some extent, as those with actual short positions are forced to cover (short-covering rally).  Until then, fast money is likely to keep the battle active within narrow ranges. At least until liquidity evaporates again...

Now to the charts.  I wrote a bit on some of them so we'll keep captions on those to a minimum.  First up: a look at the "not continuing yesterday's rally" motif, but holding sideways still good!

NOTE: ON THE FOLLOWING CHARTS WHERE THE 10 YR NOTE (IN YELLOW) ARE OVERLAID WITH MBS (GREEN), THE 10YR NOTE YIELD WILL BE SHOWN ON AN INVERSE AXIS (SO LOWER YIELDS ARE AT THE TOP). 

But perhaps the most significant chart of the day is the long long term 10yr chart with the same retrace levels and trend channel we've been using.  It indeed looks like yields at least ACT like they MIGHT POSSIBLY MAYBE be encountering support around 3.56.  There were several bounces there in HIGH volume recently AND it's roughly in line with the long term trend channel we outlined.

But how relevant do such long term lines become when seen in minute detail?  A few clicks of the periodicity buttons on the Reuters charting software, and we soon have quite a zoomed in view of the exact lines (a computer did this!  not my eyeball!  giving that disclaimer because I think it's really amazing how many technical touches both of the lines from the above chart get when seen in the short term chart below.

Lenders are passing along pricing improvements.  

HEADLINE NEWS NOTES: Uncertainty is rearing its head in eastern Asia again as the North Koreans are threatening another show of military superiority over the South Koreans. In Euroland, the ESM (European Stability Mechanism) promises to protect the financial system starting in 2013, but worries about "between then and now" have led investors to wonder if the EU's piecemeal austerity approach will ultimately backfire.   In addition, the tax bill passed, yet stocks are NOT shooting through the ceiling and bonds are holding their ground.  It's a distinct possibility that we're seeing the epilogue to a grand story of "buy the rumor, sell the news."