Way back on 3/4, we identified an "internal trendline" at the 99-20 / 99-23 price level.  An internal trendline simply connects as many highs and lows as possible.  When the line in question is completely horizontal, as this one is, it acts as a floor when prices are trading above it and as a ceiling when prices are trading below it.  The actual "predictive" value of these types of lines is less potent than it's value as in indicator AFTER it's been violated.  Still, the fact that we previously spent just over a month and a half OVER this line and almost the exact same amount of time below, which each period containing several "bounces" off the line, it seemed on 3/4, that is was more likely for this floor to hold a bit longer.  Since then, we've hit the line twice, and both times have bounced higher.  So it is again this AM.  If we were to close right now, here's what the daily chart would look like:

You can see that the last "cycle" above this line consisted of an initial rally that was prompted by headline data related to the Fed's buying program, Same as the late March Rally.  Then we can see a very prompt retracement to 23%.  The same thing happens in the March cycle, but takes much longer to play out.  After falling all the way back to the trendline, in both cycles, we rally again just around a 50% retracement level.  Again, this takes MUCH longer to occur in our current cycle as opposed to December's.  Because of this differing time frames, two possibilities emerge.  Either the similarities in price levels are more pertitent than the time frames and we are in for a rally back up to test all time highs, OR since the first cycle lasted about a month and a half, and this cycle is almost at the month and a half point, we are due to test (and possibly) break through the floor.  There is, of course, that omnipresent third option of "something completely different," but certainly, the relevance of this trendline has been quite reliable up until now.  Whatever the case, "breaking this floor" is much bigger of an indicator than the simple existence of the floor.  In other words, we'll know more about potential price action AFTER the floor is broken as opposed to being able to name the time frame that we'll stay above it.  Because of this, we'll continue to monitor this as probably our most important price level in 4.0's.  If we break it, it could signal a repeat of February and early March. 

Data Releases already out

Whatever the case, we certainly had a nice bounce of this level as we ended there on Friday, and are now 7 ticks higher.  Historically, we're more likely to see some more upside before heading back down, but it may not be as much upside as we'd hope for.  This week could be difficult for us as well as there is almost no data.  We did get Leading Economic Indicators this Am which, at - 0.3% was dead on with expectations, however it was a .1% slide from the last reading which was an upward revision from -0.4% to -0.2%. 

As far as major headlines, Sun Microsystems is being bought by Oracle for $7.4 bln.  This is at a premium to Friday's share price.

Stocks and Bonds

Whether it's that LEI report, some reaction to the past several weeks of stock gains, or concerns over financial stocks despite decent BofA earnings, stocks headed sharply lower out of the gate.  The Dow is currently down 225 to 7905.  This is just above the low of the day at 7891. 

Treasuries, after taking quite a beating yesterday, are rallying with gusto.

2Yr  +4 ticks  (.899%)

3yr  +8 ticks (1.268%)

5yr  +14 ticks (1.8%)

7yr  + 20 ticks ( 2.365%)

10yr  + 27 ticks ( 2.847%)

30yr  + 52 ticks  (3.709%)

Here's where we are on the Dow so far today versus the 10yr tsy yield:

MBS Stack

The theme for this AM is "Down In Coupon" exactly as discussed in Friday's last post.  Whereas it has been fashionable of late to "fade the fed" and take advantage of some relative value higher in the coupon stack, those opportunistic times where prepayment fears in higher coupons could be disregarded for "just a bit longer" are coming to an end.  The real fear is setting in as the next prepayment report draws nigh and fewer and fewer investors want to be holding something they paid 103-00 to 105-00 for and find out they'll be getting their principle repaid (always at 100-00) before they have a chance to earn their premium back.  So "down in coupon" we go.  You can notice on the table below that the lower coupons are performing a bit better than the higher.

FN30_______________________________

FN 4.0 -------->>>> +0-07  to 100-02  from 99-25

FN 4.5 -------->>>> +0-06  to 101-28  from 101-22

FN 5.0 -------->>>> +0-04  to 103-01 from 102-29

FN 5.5 -------->>>> +0-02  to 103-24 from 103-22

FN 6.0 -------->>>> +0-02  to 104-20  from 104-18

GN30________________________________        

GN 4.0 -------->>>> +0-06  to 100-05  from99-31

GN 4.5 -------->>>> +0-07 to 101-05 from 101-30

GN 5.0 -------->>>> +0-04  to 103-18  from 103-14

GN 5.5 -------->>>> +0-04   to 104-01 from 103-29

 Charts

Here's where we are so far today.  You may notice a triangle forming with highs just after 9, just after 10, and just before 11AM forming the top line.  We'll take a look at that later today if it becomes technically significant.

On Tap

As discussed on Friday, it's a fairly dead week.  We have almost nothing going on for the rest of the day, and indeed until Thursday.  So until then, low stocks and rallying tsy's are our friends.

Locking and Floating

We're close enough to that long term internal trendline that you might be wise to use that as a "lock trigger" unless we move much higher.  We also have the "cool dude" teal line we watched on Friday.  Interestingly enough, we got a solid bounce of that this AM (shown in the chart).  We haven't pushed back into the high levels that necessitate your own version of "profit taking" though we'd be getting close if we rally a bit more.  Finally, the technical read on the trendline and trading patterns does indeed suggest a bit more upside before further downside.  Your most important decisions this week will be whether to lock or float overnight.  On the intraday time frames, all one can really do is watch the directionality.  And as always we'll let you know about impending reprices.  As far as overnight decisions, we'll reassess that for tonight at the close.  For right now though, we may find some more upward legs today, so keep your float lights on until further notice.