MBS Live Week Ahead: Risk of Resistance Remains; What Technicals Can Actually Tell Us
If you haven't seen/read my primers on various technical analysis topics, they're linked at certain points in the text below, and will be helpful in making the most of this post. If you'd like to read them in advance, here they are:
Basic Concepts of Technical Analysis (and some jargon definitions)
Pivot Points
Support/Resistance
Trust the Technicals?
Bond markets have traded inside 2 narrow ranges all year (first 2.3-2.6, then 2.1-2.4, roughly). Narrow ranges are to be expected amid uncertainty. Uncertainty is to be expected when 2 of the world's biggest central banks are moving to tighten policy against the backdrop of potentially significant fiscal policy changes in the US. Geopolitical risks only add to the uncertainty.
Inside the most recent 10yr yield range (2.1-2.4), the levels of 2.21-2.22 have been an intermediate pivot point of fairly high significance (relative to the narrow range overall). Those were the levels we wanted to see broken if we were to get more optimistic about near-term rally potential.
Early last week, those levels looked certain to hold. The previous Friday saw a strong bounce toward higher yields, followed by a move up to 2.29 by last Tuesday. Then North-Korea headlines changed the tone for the remainder of the week.
Persistent inflation weakness via the CPI data on Friday helped endorse the bond market resilience. But even then, it was the unexpected nuclear headlines that allowed for the break of the resistance in bond markets. Without those, we still would have seen a decent response to CPI, but it would have occurred in the mid 2.2's, as opposed to 2.18-2.22% (last Friday's domestic range).
The thing about "technical" breaks of resistance levels is that they require "confirmation." It's not enough to simply make a brief move to the other side of the field (what technicians refer to as "tests" or "probes"). Technicians want to see some staying power before declaring the break of a technical level.
With all of the above in mind, it's somewhat disconcerting to be starting the week with the 2.21/2.22 boundary looking like a resistance threat--at least if you're predisposed to consider such risks. In this more bearish view, the fear would be another bounce here that ultimately results in a push back up into the 2.1-2.4 range.
The bearish case is bolstered by a "bearish divergence" in momentum metrics. Don't glaze over just yet. I know how that sounds, but it's not too complicated. It just means that a the momentum seen in some technical analysis is flat even though the momentum in yields themselves is positive. The theory is that underlying momentum is telling the truth and that yields are moving lower for artificial reasons (see the disparate behavior in the small dotted teal lines above).
Keen eyes will note that longer-term momentum metrics are trending in the same direction as yields. As you might guess, this could be used as a counterpoint to the "bearish divergence." In addition, this could be paired with a different reading of yields themselves, where last week marked a break below 2.22% and where we're in a position to hope that holds up as a ceiling this week. With today's highs at 2.227 so far, and current yields at 2.21%, that's technically quite possible.
All of this "yeah but..." stuff is part of the "fun" of technical analysis and the impossible task of using it to accurately predict the future. As I always say, it's highest and best use is to help us observe changes in established trends, rather than make predictions about the next trend. We may well be waiting for next week's Jackson Hole symposium for the next major jolt of momentum. If we're not breaking below 2.1 or above 2.4 in the meantime, nothing has changed in the bigger picture. But of course, we'll continue to dissect the micro-movements that occur well within the confines of that range.