What is a Fibonacci Level??

Good morning everyone – I hope you had an awesome weekend.

The big question in the market this morning is if 10-year treasuries will break below their 50 day moving average or if they will hold. But to dive deeper, we need to understand what a Fibonacci Retracement Level is.

A Fibonacci Level, or the “Golden Rule” in mathematics, are a collection of horizontal lines on a chart that show variance in pricing between a recent high and low price. The Fibonacci levels are drawn at a 23.6%, 38.2%, 61.8% and 78.6% decrease from the peak. In the chart below, you can see the straight horizontal lines that have these percentages on them. Knowing how these individual percentages were determined to be valuable is not important, the important part is knowing that these horizontal lines provide strong resistance to anything trying to break through them. Why is that? Because investors all over the world are trading based on the same lines. These largely determine trading patterns because people all over the world believe they have value and trade accordingly.

Above is the 10-year treasury chart since the beginning of February. A reminder – the 10 year treasury and MBS pricing typically move inversely meaning when the 10 year treasury falls, mortgage pricing gets better and vice versa. As you can see, the 10 year has been falling since the beginning of April which is about when we started to see a rebound in mortgage pricing. Today, the 10 year treasury is being squeezed between its 50 DMA and a Fibonacci level (23.6%). Todays candle stick is highlighted and as you can tell, is trading in a very tight range already having touched both its floor and ceiling so far this morning. Days with this narrow of a trading channel lead to a more violent breakout one way or the other. If the 10 year does break below today, there is a lot more room for it to fall before its next floor and we would see an improvement in mortgage pricing. However, if it breaks above, there is another ceiling immediately following the Fibonacci level. With the chances of a violent breakout of the 10-year, we are recommending locking in the gains we have seen over the past month.

Have a great day everyone!