MBS CLOSE: Point, Counterpoint, And Lots Of Charts...

Mostly charts for today's close...  Some good...  Some Bad...  Some just in a zort of zen-like existential state not saying anything in particular, but simply "being."

There is, however, one very important textual item to cover which will be pertinent to some of the charts and to our prospects in the near future.  AQ already touched on it.  With respect to today's rally in tsy's (which did better than MBS), over 40% of the volume was from fast money accounts such as hedge funds.  This being the case, AND knowing their MO is short term range trading/profit taking, it would be prudent to expect profits to get taken soon.  Some of the charts below suggest sooner than others! 

But let's start with just today's look at MBS, the 10yr Tsy, and the Dow...  Before that even, there's a brief quiz...

Yes...  To some extent today was indeed a "facemelter."  But like unattended bowls of porridge, the facemelter had a couple different heat settings.  All of the lines below connect various low points of the day.  The teal lines are "too cold" in that they are the less-sloped exception to a majority of today's range.  Conversely, the red are the more-sloped exception.  Yellow lines connect intraday lows that represent a majority of the day's movement.  Just thought you should know in case prices rally tomorrow so we can extend that yellow channel.  This chart is one of the more positive as it doesn't exhibit much abatement of the uptrend suggesting we can carry into tomorrow.  And even though below charts might suggest that Tsy's will not, MBS COULD still do it on their own given how wide spreads got on the day.  There is over 6 ticks of room to tighten and still land on today's lows.

You can see above, the tsy rally decreased in intensity as the day wore on and was unwilling to poke through 3.53.  This apparent bottoming out may coincide negatively with some charts to follow.

To wit, notice that the VERY regular trend of higher lows that mark the reign of QE HAVE NOT YET BEEN BROKEN!  We need a break lower to get really comfortable with an extended tsy rally....

Something else might jump out at the technical analyst in you (i think that's the side that likes the frosting)...  The oh-so-popular "head and shoulders" formation--or at least the semblance of one...  This is considered a fairly reliable indicator, BUT opinions vary widely on the minimum requirements in order to earn the title.  I'll give you the basic idea of why they call it a "head and shoulders..."

Capcihe?

Ok... Back to some of the key features and their significance...  because of the choppiness on the first shoulder, there are two potential "neck lines" which is the key floor that would give the indication that yields will move lower.  In one case we're JUST reaching it, and in another we have a bit more to go.  On the pessimistic side, in neither case have we broken it, but on the bullish side, the market DID exhibit the extreme increase in volume that characterizes the consummation of this tech...  The two lines below correspond to the two candidates for neckline...

So hitting today's levels are potentially cool, but bustin' out under 3.4671 would be super peachy....  On the pessimistic side, what if today's bottoming out on an intraday basis corresponds to us meeting resistance at the red line?  That suggestion is for no yield drop tomorrow...

Getting back to MBS, and getting back to something bullish, we've FINALLY and DEFINITIVELY broken a "lower high" downtrend in MBS prices...  You can see the two most major high points since the market tanked marked by "1" and "2," and the break well through the line today.  Of course this needs to hold tomorrow (and better yet, into monday) to mean more, but it's promising.

To conclude with a "take from it what you will" chart, here is today's star of the show, 4.5's (yes 4.0's gained more, but not in terms of relative value!)

What does it mean?  Well, you tell me...  What do you think?  I see a positive break through not one, but two significant lines.  First, the teal line is one we've discussed in the past which stood as the very first low the market made after Fed Buying was announced.  Potentially more importantly, this is also where Black Wednesday finally stopped the punishment...  A significant line indeed, BUT one we broke mid month as well AND failed to stay above...  So we need some more confirmation than last time for sure...

Then there's 'ol Red which is just an internal trendline from the last ceiling we encountered which happens to connect to the floor we bounced off right before we fell through black wednesday's lows...  Not as significant here, but could provide support in the event of moderate losses tomorrow.  Likewise, if we break it on what APPEAR to be moderate losses, it could suggest a further push down to what I think is one of the most important levels of the year in the teal line.  If we fell through teal, recent experience at least suggests all is not lost.  Get these bad boys down to a 94 handle however, and it might be time to add a few #'s to Thursday AM's prominent recurring weekly report...  We'll pick it up tomorrow with the answers to all these graphical riddles.  But for tonight, enjoy the gains...