While yesterday was a ho hum, mainly flat day, Wednesday’s trade has been anything but.  It all started across the pond as Germany’s Business Climate Index jumped a few points and Euro zone PMI Indexes (services, manufacturing, and composite) all came in on the plus side.  On the flip side, Fitch downgraded Portugal as another one of the PIG countries struggles with its debt.

Durable Goods greeted stateside traders at plus .5% while the ex-transportation component was plus .9%.  Both were a touch below consensus.  Weakness in Durables can be traced to New Home Sales which fell 2.2%, setting a new record low (308K units annually).  All of the above has pushed the 10 year note towards the bottom of the range, down 22/32’s to yield 3.77%.  Mortgage backs have fared better with spreads tightening (Fed taking 1.25 billion out of the market) but are still off a smooth 11/32’s.  Stocks complete the sea of red hat trick, off 20 points on the big board.

While the economic data is seen a net neutral, the technical set up on the chart looks more like a pit bull.  Reason being is that the selling today has sliced through the trend line that has restricted the downside (acted as support) since December 2009.  Couple that with bearish oscillators kicking in and a breach of the 40 day moving average and you have the makings of the “perfect storm”.

Today’s day-end close will be very important.  We need to hold 116 22/64th on the futures chart (yield equivalent is 3.75%) to feel better about the range trade continuing.  With current levels at 3.77%, the market needs to boot strap itself back together or further downside (worsening mortgage pricing) will occur.  42 billion in 5 year notes (today’s auction) could be the key.  Yesterday’s 2 year auction was a dog, giving traders suspicious minds about the outcome of today’s 5’s and tomorrow’s 7’s.  Good participation will go a long way to helping our cause.  Given the way we ticked off the Chinese lately, that is not a given.  Keep both hands on the wheel.  We’ll update you on the auction results (12:00 cst).