Rate Techs: Benchmarks Test Key Cluster of Resistance

By: Matthew Graham • Fri, Apr 15 2011, 11:03 AM

10yr notes have sent a clear message this week that they'd prefer to stay above 3.42%.

3.42 is a significant level from a technical perspective. In other words, it's demonstrated a strong track record of resistance and support, depending on the side from which yields approach. It should be noted however, that it's part of a slightly larger "cluster of resistance" that extends as low as the high 3.39's (the chart below just has the upper end of that zone marked with the lower red line. The upper red line is the recent 3.50 support seen yesterday).

Since the late January breakout of the infamous and extended "RANGE TRADE," 10yr yields have crossed through this "cluster" EXACTLY TWICE, though this will be the third time they've approached it in as many weeks!

This behavior that sees certain levels touched or tested frequently, but broken infrequently, is the major clue of its technical significance. But what does THAT mean? "Technical Significance?" Simply put, it's not so much that these lines allow us to predict the future, but rather that they provide trigger points that help determine when TRENDS are either INTACT or IN THE PROCESS OF CHANGING.

Here's the same chart as above, but with different trendlines laid over it. This is a perfect example of how yesterday's rally helped determine whether or not a recent uptrend in yields is/was intact.

Conclusion: not only is the bearish trend no longer intact, but yields bounced off the opposite side of that previous trend with above average volume (in the futures market). Think of it like stopping at a door, opening it, walking through, and slamming it shut as you head into a different room. This is "confirmation" that the market is no longer in the previous trend.

With that confirmed breakout of the DIAGONAL range, you might glance back at the first chart and see evidence for a HORIZONTAL trend (now that 3.5 comes into play!). That provides us with a logical piece of evidence as to why 10yr yields are content to so rapidly seek out and dance around the 3.42 level this morning.

Even though 10's are battling with the horizontal trend now, MBS read into this "sideways movement" as a less volatile situation, one that helps create gains like this:

Rate sheets are better this morning... If 10's can break CONVINCINGLY below 3.42 (needs volume and time), MBS can improve further, creating reprice potential. Of course the opposite is true if 10's begin to retrace toward 3.50, but if that level were to provide support again, it would only be more evidence that the recent bearish trend is over.