What the heck are ‘technical trading patterns’?
If you’ve been an avid reader of ‘rate update‘ then you know that I often refer to ‘technical trading patterns’ (TTPs) as a factor that can have a major influence mortgage rates. Typically TTPs have the most impact when the markets lack new economic data and/ or significant stock market momentum.
However, very few people are familiar with the concept of TTPs and how they impact mortgage rates. In this post I will attempt to explain what TTPs are and how they impact our advice to “lock” or “float” interest rates.
To preface this explanation it’s first critical that you know that mortgage rates are 100% determined by the price of mortgage-backed bonds (MBS’s). When the price of MBS’s increase, mortgage rates decline. When the price of MBS’s decrease, mortgage rates increase.
TTPs are essentially derived from the discipline of technical analysis. Believers in technical analysis claim that previous price data for a specific financial security can be used to predict the future movements of that price.
In this case, TTPs offer a way for us to assess patterns in the price history of MBS’s and determine how future prices will react.
Specifically, in evaluating TTPs we look for where the current price level for MBS’s are relative to the average price levels over a 10, 25, 40, 50, 100, and 200 day time frame. These averages are called “moving averages” and are calculated by averaging the price level of MBS’s over a specified time frame.
For example, the “10-day moving average” is calculated simply by averaging the price of MBS’s over the previous 10 days. Likewise, the “200-day moving average” is calculated by averaging the price level of the previous 200 days.
What makes identifying TTPs possible is that MBS prices often react in a consistent manner when they approach these “moving averages”. Therefore, we often see very predictable patterns of price changes when MBS’s approach these levels. Because mortgage rates react inversely to the price of movements of MBS’s once we can accurately predict price movements we can also predict mortgage rate movements.
For example, in the chart below look at the first circle near the top left hand corner. At this point MBS prices are falling and approaching the 200-day moving average (blue line). We know that when MBS prices approach this level they tend to react in one of two ways.
One reaction is for them to “bounce” higher off the 200-day moving average which causes MBS prices to rise and rates to drop. However, in this instance MBS prices reacted in the opposite manner. They dip below the 200-day moving average and rates rise as a result.
At times like this we would advise or clients to float as long as MBS prices remain at or above the 200-day moving average. As soon as they close below the 200-day moving average we know rates will get worse before they get better. Therefore, we advise a “locking” position as soon as MBS prices dip below the 200-day moving average.
The second circle near the bottom of the chart shows MBS prices getting support at the “S2 line” (green line) which is not a moving average but likely a low-point in recent trading history. At this level MBS prices are able to find a bottom and begin rallying. At this time mortgage rates are likely .25%-.375% higher compared to only a few days earlier (when MBS prices were up near the 200-day moving average). Because MBS prices appear to have bottomed we would recommend a “floating” position at this point as mortgage rates show signs of improvement.
Indeed, off this floor MBS prices rally for 5 days and rates drop back down by .25%-.375%. Once they approach the 200-day moving average the rally loses steam and in the third circle show signs of weakness.
Much like our approach at the first circle we would recommend a “floating” position so long as MBS prices remain at or above the 200-day moving average. As soon as prices dip below this level we know that prices are likely to decline pushing rates higher by .25%-.375% once again.
This is just one example of how we would use technical analysis to identify TTPs that will impact mortgage rates. This concept is somewhat complicated and takes time to learn. If you have questions about TTPs or would like to make a comment please do so below.
Posted: October 31st, 2008 under Economics & Interest Rates, General Mortgage Info., Rate Update.
Tags: MBS's, Mortgage backed bonds, mortgage rates, predicting mortgage rates, technical analysis, technical trading patterns, TTPs
Comments
Pingback from My Mind on Mortgages » Rate Update November 4, 2008
Time November 4, 2008 at 7:57 am
[...] ahead we still believe that technical trading patterns will help rates move lower in the coming weeks. Shorter term transactions are more difficult to [...]
Pingback from My Mind on Mortgages » Rate Update November 10, 2008
Time November 10, 2008 at 8:20 am
[...] prices continue to walk a tight rope along the 200-day moving average. This important level of technical support/ resistance is what we’ll have our eye on over the course of the next few [...]
Pingback from My Mind on Mortgages » Rate Update November 12, 2008
Time November 12, 2008 at 8:29 am
[...] the technical trading patterns in the mortgage-backed bond market did not appear favorable for mortgage rates they have managed to [...]
Pingback from My Mind on Mortgages » Rate Update November 13, 2008
Time November 13, 2008 at 8:45 am
[...] bond prices managed to break back above the 200-day moving average price level. From a technical standpoint this could be very good news for mortgage rates. We will maintain the floating position that we [...]
Pingback from My Mind on Mortgages » Rate Update November 17, 2008
Time November 17, 2008 at 8:36 am
[...] bond (MBS) prices continue to hover around the all important 200-day moving average. History tells us that when MBS prices approach the 200-day moving average they have a tendency to &#… (pushing rates higher or lower). However, today represents 9 straight days in which prices have [...]
Pingback from My Mind on Mortgages » Rate Update November 18, 2008
Time November 18, 2008 at 8:33 am
[...] still continue to monitor technical trading patterns. Specifically, mortgage-backed bond prices continue to hover around the 200-day moving average. [...]
Pingback from My Mind on Mortgages » Rate Update November 21, 2008
Time November 21, 2008 at 8:10 am
[...] Tuesday’s ‘rate update’ we mentioned the unorthodox technical trading patterns that the mortgage-backed bond (MBS) market was experiencing. Today marks 13th day that MBS prices [...]
Pingback from My Mind on Mortgages » Rate Update December 1, 2008
Time December 1, 2008 at 8:08 am
[...] touched the previous lows hit back in late January of this year. This is a classic example of a technical layer of resistance where rates cannot break through previous lows on the first try. We wouldn’t be surprised [...]
Pingback from My Mind on Mortgages » Rate Update December 23, 2008
Time December 22, 2008 at 7:52 am
[...] rates dipped to 37-year low levels early last week they have gradually crept higher. Technical trading patterns are likely to [...]
Pingback from My Mind on Mortgages » Rate Update August 14, 2009
Time August 14, 2009 at 7:39 am
[...] a technical perspective mortgage-backed bonds have broken above an important later of resistance. As long as we remain [...]
Pingback from My Mind on Mortgages » Rate Update August 18, 2009
Time August 18, 2009 at 7:17 am
[...] mortgage-backed bond (MBS) prices are battling tough technical trading signals & a reversal in the stock market. Currently, MBS prices sit just above the 200-day moving [...]
Pingback from My Mind on Mortgages » Rate Update August 24, 2009
Time August 24, 2009 at 6:45 am
[...] in the way of economic data to evaluate today so mortgage rates will likely take direction from technical trading patterns & the equity [...]
Pingback from My Mind on Mortgages » Rate Update August 26, 2009
Time August 26, 2009 at 6:43 am
[...] *The technical trading picture is not attractive for mortgage rates right now. The last few times 30 year fixed rates have touched 5.00% they have bounced higher in the following days. [...]
Pingback from My Mind on Mortgages » Rate Update August 28, 2009
Time August 28, 2009 at 7:21 am
[...] bond (MBS) prices are now trading within a tight trading range in between technical layers of support and resistance. This is illustrated in the chart below- MBS prices have remained between the blue line on the top [...]
Pingback from My Mind on Mortgages » Rate Update September 14, 2009
Time September 14, 2009 at 7:17 am
[...] prices have temporarily broken below the all important 200-day moving average so we are going to shift to a locking [...]
Pingback from My Mind on Mortgages » Rate Update September 16, 2009
Time September 16, 2009 at 7:01 am
[...] will remain in a neutral position to see how the technical trading patterns shape up. Be prepared to [...]
Pingback from My Mind on Mortgages » Rate Update September 18, 2009
Time September 18, 2009 at 7:00 am
[...] now mortgage rates appear to reacting to technical trading patterns. We are going to keep our locking bias in [...]
Pingback from My Mind on Mortgages » Rate Update September 28, 2009
Time September 28, 2009 at 7:21 am
[...] bond prices have successfully broken above the all-important 200-day moving average. As a result mortgage rates have improved modestly from the middle of last [...]
Pingback from My Mind on Mortgages » Rate Update October 12, 2009
Time October 12, 2009 at 6:47 am
[...] will face technical support at the 200-day moving average when they begin trading again [...]
Pingback from My Mind on Mortgages » Rate Update October 16, 2009
Time October 16, 2009 at 6:54 am
[...] We have been in a short-term floating position over the past week hoping that MBSs would find support at the 200-day moving average. However, even with weakness in the stock market today, due to weak earnings from bellwethers [...]
Pingback from My Mind on Mortgages » Rate Update October 23, 2009
Time October 23, 2009 at 6:55 am
[...] MBS prices have dipped below the all-important 50 & 200 day moving averages. With this technical trading pattern mortgage rates risk moving sharply [...]
Pingback from My Mind on Mortgages » Rate Update October 29, 2009
Time October 29, 2009 at 7:09 am
[...] Rates have now recovered by about .25% from the 10-day highs. From a technical standpoint it looks like mortgage-backed bonds may have run out of steam. Coupled with the economic data for [...]
Pingback from My Mind on Mortgages » Rate Update November 5, 2009
Time November 5, 2009 at 7:45 am
[...] Mortgage-backed bonds (MBSs) hardly budged on the announcement and they continue to trade sideways between technical support and resistance. [...]
Pingback from My Mind on Mortgages » Rate Update November 17, 2009
Time November 17, 2009 at 7:22 am
[...] rates are unchanged thus far this morning. We remain cautious as the technical trading patterns in the bond market suggest we may see rates move higher in the coming [...]
Pingback from My Mind on Mortgages » Rate Update December 1, 2009
Time December 1, 2009 at 7:28 am
[...] a technical perspective MBS’s have appeared ripe for reversal for some time. Here on ‘rate update’ we [...]
Pingback from My Mind on Mortgages » Rate Update December 14, 2009
Time December 14, 2009 at 6:53 am
[...] a technical standpoint mortgage-backed bonds have stabilized at the 200-day moving average. If prices can hold we may [...]
Pingback from My Mind on Mortgages » Rate Update January 22, 2010
Time January 22, 2010 at 7:06 am
[...] the first 13 trading days of 2010 (when MBS prices rise it pushes rates lower). This is building up technical resistance which will cause rates to reverse at some point in the future. The question is [...]
Pingback from My Mind on Mortgages » Rate Update January 25, 2010
Time January 25, 2010 at 7:20 am
[...] Mortgage rates appear to be poised to reverse higher on technical signals. [...]
Pingback from My Mind on Mortgages » Rate Update February 18, 2010
Time February 18, 2010 at 7:11 am
[...] this point mortgage-backed bonds (MBS’s) are hanging on to technical support. Should prices drop below this level mortgage rates would likely move another .125%-.25% [...]
Pingback from My Mind on Mortgages » Rate Update November 3, 2008
Time November 3, 2008 at 8:36 am
[...] after rates had increased by approximately .50% over the course of a week. Based on the technical trading patterns it looked liked mortgage-backed bonds may have bottomed and gain some upward momentum which would [...]