Mortgage bonds managed to close just above their 50-day moving average yesterday, and then opened the day just below this critical level. They have since climbed higher and are now right at the top of an upward trading channel. However, bonds are now showing signs of weakening, which will likely lead to a fall where they test the bottom of the trading channel. If they remain within the upward channel, we will still be in an improving short term cycle. However, if they break below this level, bonds will have significant room to the downside before hitting their next floor of support.
After a rough few days, stocks are due for a reversal to the upside. Although they are lower in early morning trading, they could reverse course and make a run higher. With bonds at the top of a trading range, this seems to be the perfect opportunity for stocks to be the beneficiary. Since bonds aren’t likely to break above the downward channel, the natural flow of money will be into the stock market. This could add short term energy to stock prices and cause bonds to fall to the bottom of their channel. All of this presents a great opportunity to lock in now before bond prices fall.
Given the current chart pattern, the near-term direction will likely lower for bond prices. Thus, we will switch to a locking bias.