MBS Live Day Ahead: Bond Patterns Repeating as ECB Stays The Course

By: Matthew Graham

Corrections are one of the trading themes we frequently discuss when there is broader momentum in either direction.  In its simplest form, a correction can be thought of as a short trend (2-4 days) that points in the opposite direction from prevailing longer-term momentum.  If you prefer not to try to understand market jargon based on the typed word (I certainly wouldn't), today's chart makes it easy.  

In the chart, the only true corrections are the 2 teal lines on the right side.  The leftmost line would be better characterized as a the upper boundary of a 2.5 month consolidation, and the late December line would be taken with a grain of salt in any event due to the weirdness often seen in end-of-year trading.

At some point, one of these corrections will transform into a full-blown reversal.  That will mark the start of a sustained downtrend of undetermined magnitude.  The point is that it will be longer than a few days.  The stochastics (wavy lines on the bottom of the chart) help us identify when that might be happening.  In that case, we would see the lines (especially the green/teal lines) move below the oversold level.

Today has some small chance to fit inside that definition of a reversal, but bonds are notably already under pressure.  Yields were lower earlier this morning after the ECB stuck to its guns in its policy announcement.  Specifically, the ECB continues explicitly stating that its bond purchases will run as long as they've promised and that they could be increased if needed.  We're now under pressure as Draghi begins talking about how good the economy is, despite the reassurances, and how he sees upside risks to growth (i.e. it could be better than we expect).

The remainder of Draghi's press conference will shape the morning trade while we could see some afternoon volatility surrounding the end of the week's Treasury auction cycle at 1pm.