Mel's Blog

Prices may have finally found a bottom!  Back on May 15th, I issued a very important lock alert as prices broke below their critical 200-day MA floor of support.  I have often discussed the importance of this floor and how prices had only crossed the 200-day MA twice in over two years.  The crossing of the 200-day MA has represented a major change in market sentiment in the past, and last month's break below it was no exception.  Since breaking under this floor, prices have now declined by 274bp as of the lows hit this morning!   

But we are now finally turning optimistic on bonds!!!  Is it because Bill Gross just went bearish?  No.  It is because the long term floor of support has finally been hit and appears to look as if it may hold and support prices.  Mortgage Bonds are showing the early makings of a reversal after opening lower and trading beneath the important long-term support level we had identified to you at $97.84.  The Bulls quickly recovered and pushed prices higher and back above this critical floor.  Why is $97.84 such a significant floor of support?  The Bond's rally last Summer started when prices hit this level back on June 26, 2006.  Prior to that, $97.84 also represented a support level dating back to May 2002!  This proven strength of support is why we had faith in it's ability to hold prices and stop the bleeding.

Traders appear to be betting on this floor supporting prices, as even a much hotter than expected Retail Sales this morning couldn't pressure prices lower.  May Retail Sales soared 1.4% higher, far above consensus estimates of 0.6%, while recording the largest gain over the past 16 months.  And seeing the Bond reverse convincingly higher in the face of strong economic news is yet another good sign.

Let's closely watch how the trading day unfolds, but I feel prices will improve.  And if the Bond can hold its gains, the start of an improving price trend should be ahead.