MBS AFTERNOON: Failed Retest of Lows!

You might remember from "Technical Analysis 101," that when the price curve reaches a trendline it's called a "retest."  If it breaks through the trendline, that is usually known as a "successful" retest.  However, most technicians have certain guidelines for HOW MUCH a price curve must violate a trendline in order for the retest to be considered successful.  One common guideline is 3%.  For me, as far as MBS is concerned, I'm inclined to go with 2.5 to 3 ticks depending on volume, volatility, and length of time the trendline is violated. 

In the case of today, the trendline we discussed yesterday is again in teal and again referred to as "base camp."  (We HOPE it remains our base camp!)  We did, in fact, retest that trendline a few times today, but given the retest only broke through by 2 ticks and in neither coupon's case held the lows for very long, the retest was unsuccessful.

So what does this all mean?  Well, there's a chance you saw minimal reprices for the worse around 1pm eastern as that was the time frame of the most significant retest.  But if we hold current levels, the "ahead of the curve" lenders will probably give it back this afternoon.  More importantly from a medium to long term perspective, it would add another day of credibility to Project: Base Camp.  Recall (if you forgot) that the "base camp" line was established minutes after the fed meeting and held firm yesterday amid significant volatility.  Again, going back to Tech 101, the more times a line is retested unsuccessfully, the more of a true TREND it becomes.  In this case, since the line is horizontal, it would be SUPPORT rather than a TREND. 

It would be a beautiful thing if we can continue to hold these levels.  Every time we have spiked high in the past, we've gone down almost as fast.  But this time, likely due to the causes for the price increase, so far so good.  The industry needs to consolidate for a bit longer, become comfortable with new price levels, establish reliable prepayment speed benchmarks, and give lenders some time to catch up in terms of manpower and funding lines.  Until that happens, we'll be at the whim of day trading-type movements like yesterday.  We still believe the new year will hold better things for MBS and possibly even sooner, but we are on very thin ice (as can be noted with "base camp's" slip out onto the "icy cliffs" above.  Should we go over the cliffs, it could be a reasonable distance before we hit bottom.

Despite yesterday's run-up/give back, vigilance allows you to float yet longer.  I know it seems like that's been the blanket advice recently, but in general, we've been doing nothing but improving, and will, by all indications, continue to do so barring the unforseen.  Keep in mind that the "unforseen" seems to be seen more and more these days.  Also keep in mind that "down to the day" market timing considerations are a fool's errand.  All you need to know for today for deals in process is that you are welcome to wait for tomorrow morning as long as things don't change significantly between now and then.  We'll be back with more technical analysis about this year with respect to previous years sometime in the next few days.