• MBS end 1 tick down at 100-29
  • 10yr Note Yield at 3.725
  • S&P up 5 points, all gains late in the day
  • 30yr Auction pressures rates early and helps out late
  • This one's a good read, and a tangible concept to share with clients and business partners

Something Epic?  Let's not get too carried away...  After all, we've been here plenty of times before only for the much anticipated turning point to send markets sideways--merely prolonging the "waiting for guidance."  But where exactly is "here?"  And why is it more epic than every other day that bonds end the day "honing in" (trading in a narrowing orbit AROUND a certain price) on key technical levels?

Fortunately, the 2 day chart contains a good example of something we see fairly often, which is prices or yields coming to rest on or near a technical level or a technical trendline after trading in a narrowing orbit AROUND that level (that word keeps getting the caps lock treatment because it's not normally considered the nature of trendlines to exert this sort of "gravity" on prices or yields where the curve moves back and forth across the technical line as opposed to the more conventionally assumed "magnetism" that repels the chart in one direction or another)

The above short term chart lays a good foundation for what follows in 2 ways.  Obviously, it's our example of a fairly common pattern of movement around a technical level, but it also marks the approximate levels, in both MBS and Tsys, that will serve as the center of focus as we zoom out to consider whether or not this particular crossroads is indeed epic. 

It's in "zooming out" that the significance of current levels seem more and more epic.  To arrive on a short to medium term technical level at the close: fairly regular occurrence.  To have that level coincide with longer term technical levels: less regular.  To have prices and yields trading around these shorter and longer term coincident levels AND for MBS, Treasuries, and stocks to all arrive at similarly technical levels: uncommon.  HOWEVER!  It is MUCH MORE COMMON for this to happen just before a much expected economic event, ESPECIALLY if potentially volatile events precede it, but fail to nudge markets from their technical orbits.

All that "stuff" mentioned above is exactly what we have after this round of treasury auctions leaves MBS and Tsy's at pivot points heading into tomorrow's retail sales number.  Let's start with the MBS chart to look at how short and long term technical patterns coincide around the same price:

That 100-28 and thereabouts is a significant pivot for MBS, there can be no doubt.  Since fall 2009, there is probably no better candidate for the prom king of pivot points.  Not only do we see the shorter term "honing in" above, but zooming WAY out, longer term trends are colliding around the same level.

That's all well and good, but as we continue harping on, MBS are certainly not a static distance from treasuries in 2009/10, so as is often the case, we wouldn't ask any major technical questions of the market gods without confirmation from the benchmarks.  So what does the king of benchmarks have to say about short+long term honing around technical levels?  It turns out, quite a bit!  Just look at how many times yields have bang bang banged around that 3.72 level recently!

In fact, if we had the horizontal space to spread this puppy out, you'd be able to see an amazing amount of "touches" over intraday periods.  But even without that, the case for a technical crossroads is certainly building quickly.  Can we reach across the lines and get equities to give us some sort of confirmation of all this?  You bet!  Granted, it's not the same triangle pattern around stock price levels, but with stocks in perpetual rally mode for nigh on one full year now, the "double top" pictured below is every bit as good.

So we're either looking at one of the technician's favorite and most tangible signs of reversal in the early stages: the double top, or stocks are poised to break through the resistance implied by their previous highs (just under 1150 in the S&P).

As you might guess, all 3 markets discussed tonight are poised to go one direction or another from this proverbial fence.  A stock rally is likely a bond sell off and vice versa.  Sadly, my crystal ball won't tell me where retail sales are printing tomorrow and thus, the likely direction of the markets, but this rare confluence of technical considerations introduces the possibility that the move could be big.  It's important to note that a move down in stocks/up in bonds would likely not violate any established range boundaries, but a move up in stocks would! 

And although treasuries and MBS have plenty of room to run lower before hitting their worst levels of the year, that bullish breakout in stocks could serve to magnify the effects of an otherwise uneventful day of losses in bonds.  This doesn't mean one eventuality is more likely than the other, but that there is an uncommonly wide range in which bond prices could land in the near future.  Not "once in a blue moon" wide, but wide enough to turn up the dial on the vigilance meter, stay defensive, and be prepared for swift action.