MBS Live Day Ahead: Looking for Signs of Support Amid Muted Data

Today is light in terms of scheduled economic data and events.  This will change rapidly over the next 2 days (ADP/ISM services tomorrow, followed by NFP Friday).  That leaves today as a sort of pre-game warm-up before traders get back to more serious business.  Still, the way trading unfolds can tell us about underlying sentiment.  

One of the biggest questions at the moment is whether or not we've seen enough weakness for bond traders to get comfortable as "buyers" again.  In other words, we're looking for signs of a ceiling bounce for rates.  In terms of technical analysis, several formulas suggest now is a good time.  That's not to say the math is suggesting that bonds WILL bounce here after 5 ugly, red days.  Rather, the technicals suggest bonds have increasingly gotten into a position that makes them look more eligible for a bounce.

In today's chart, the top two panes show 2 technical overlays that look somewhat hopeful.  In the upper pane, overnight trading in Treasuries failed to break above the upper bollinger band.  If that continues to be the case throughout domestic trading, it would be one vote in favor of a friendly bounce. The middle pane show short-term momentum in the form of fast stochastics.  This isn't overtly bullish yet, but if we hold flat or better today, the blue line would cross below the red line.  That would another reversal cue.

Of course, being eligible to bounce and actually bouncing are two different matters.  The longer-term momentum metric at the bottom of the chart serves as a reminder that we could easily see more weakness before longer-term technicals indicate an "oversold" condition.  Moreover, the week's most significant data is yet to come.  It could easily derail any friendly bounce that happens to take shape today.  Still, today should provide a glimpse into the "all things being equal" underlying sentiment among bond traders (which will serve as a backdrop for digesting the next 2 days of data).  To whatever extent that backdrop is friendly, it would improve our odds of weathering the storm of potentially stronger econ data.