Stock market strength has pressured bonds, notes, and mortgage backs as we head towards the close.  With the Dow up 96 points trading well over 11,000 and S & P’s over the 1200 level (which was good resistance and very psychological), the path of least resistance is for additional improvement.  JPMorgan gave stocks the boost from the get go, beating earnings expectations by 10 cents and saying all the right things about credit quality improving etc.  The 10 year note opened in the red but by only a few 32’s, holding onto the breakout level below 3.83% yield on the 10 year note.

That bullish momentum has been challenged as we are now trading at 3.86%.  Technically savvy traders call the formation a “double top” that you can see by the horizontal line across the top.  Confirmation is now being made as we have taken out the base from which the last leg of this rally started.  In chart terms you can see this is the level below 116 10 (closed futures session at 116 09).  Traders call this a “bear trap”, stranding the bulls on the expected breakout above 116 10.  Further confirmation of the next move being to worsening Austin mortgage pricing can be found in the fact that we failed to hold above both the 8 day and 21 day moving averages.  They cross the right side of the chart at 116 12.  SStochs have also made a bearish cross.

In proper context, the selling today has been a function of overbought readings and the need for consolidation.  We do not think its anything huge but will most likely correct to 115 31 on the chart (yield equivalent of 3.92%).  Mortgage backs are now down 11/32’s on the day and will probably give up at least another 8/32’s before we reach our target.  Time to be careful out there.