MBS Day Ahead: Grains of Salt, No Duh, and Bearish Divergences

Congratulations!  You’ve reached the end of 2014 in bond markets.  Everything from here on out is simply the epilogue to an already-concluded story.  10yr yields went from 3.0 to 2.2, give or take.  At current levels, the only moves that would really change the bigger-picture tone would be roughly 20 basis points in either direction (so 2.40 or 2.00).

Why the early close?  First of all, it’s not really the end of 2014.  It’s just that events and trading reactions will be taken with heavy  grains of salt from here on out.  Past precedent suggests that trading volumes will be declining steadily toward 10% of normal by Christmas Eve.  Changes in MBS prices will continue to influence rate sheets, of course, but there’s less to be concluded about their significance to the road ahead.  In other words: cruise control.

One place markets love to find guidance during periods of cruise control is in technical trading levels.  On that front, things continue to be not-so-great for bond markets.  As we discussed yesterday morning, the mainstream techs were already saying “turning point!”  Here’s an updated version of the same chart with the same conclusion.  It’s not annotated this time, so briefly, from the top/big section to the bottom:

1. Orange candlesticks hitting middle blue line (Bollinger band).  This could be supportive if we bounce today, but hasn’t recently been a very meaningful tech as evidenced by the November sloppiness.  Ideally, this would be holding cleanly in the upper or lower half and breaking firmly to the outside band when the middle band is broken.

2. Stochastics.  The purple line crossed over the green line and both are moving north.  That’s bad. 

3. Similar here with the blue bars (MACD).  Ascending = bad

4. Guess what the ascending red line means? (RSI).  If you guessed “bad,” you win!

 

When we talk about the lower three technical studies being “bad” when they move higher, they’re all simply fairly similar gauges of momentum.  And with 2 big days of selling in bond markets, if someone tells you “hey!  Momentum is negative!” like it means something, you might just say “Duh!”  So get that out of your system if you need to.  I’m often thinking it as I write this stuff anyway.

BUT, there are some subtleties.  We’re seeing a clear example of one now, and it’s the “divergence” that sometimes occurs between momentum gauges and the actual movement in yields.  It’s not too complicated, really.  We’re just looking for instances where the momentum charts and the yield chart are making different patterns.  For example, from Dec 1 to Dec 16, there are two nice bounces both in RSI and Stochastics (red line and purple/green lines).  Yet the corresponding move in yields is successively lower.  Technicians would call this a bearish divergence, meaning that the underlying momentum is telling a more bearish tale than the yield movement because it’s holding steady while yields are falling.  Basically, it’s akin to saying “yields are bluffing because momentum isn’t getting any more bullish.” 

The only small reason to keep an eye on that is that it can occasionally hearken a bigger, nastier bounce.  Oftentimes though, it’s a prelude to markets ‘tuning out.’  Here’s hoping it’s the latter!

Article source: http://www.mortgagenewsdaily.com/mortgage_rates/blog/419030.aspx

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