Mel's Blog

Existing Home Sales for April was reported at 5.99 Million units, which was below expectations of 6.13 Million.  This slower pace of sales lifted the inventory of unsold existing homes to a 8.4 Month level, which was a sizable jump from last month's reading of 7.3 Months.  Lawrence Yun, National Association of Realtor's Senior Economist, had this to say about the report  "We’ve been anticipating slower home sales because many sub-prime loan products are no longer available.  In addition, increased scrutiny by lenders is stopping risky mortgage origination, which is good for both consumers and the lending community.  Fortunately, a wide availability of conventional mortgage products and the 4.5 million jobs created over the past 24 months will help to stabilize the market going forward.”  But no matter how you look at it, this month's report was lousy.

Next week the economic calendar expands dramatically with several heavy-hitting reports.  Tuesday kicks off the week with Consumer Confidence; Wednesday has the latest FOMC meeting minutes; Thursday brings 1^st Quarter Preliminary GDP, the Chicago PMI, and Initial Jobless Claims; and Friday brings “thunder and lightening” with the May Jobs Report and Core PCE Inflation.  Traders will probably keep most of their “trading powder” dry until Friday.  

Technically, bonds are showing some signs of a possible rebound.  Yesterday ended with a “Hanging Man” candlestick indicating the market may have found a bottom to the recent downward trend.  However, this candlestick requires further confirmation with a subsequent move higher and we have not yet seen this so far this morning.  Bonds remain “oversold” according to the stochastic oscillator and there is the possibility of a positive stochastic crossover buy signal if we get some favorable price action today.   

Mortgage Bonds are sitting on an important floor of support at $97.81.  The reason this floor is so important is that the next floor is located an enormous 72bp lower.  As we have recently seen with the break of the 200-day Moving Average, a fall below an important floor will lead to more price declines. 

We need to see bonds bounce off of the current floor and move back above resistance at $97.97 to break above the downward sloping Upper Trend Line.  Unfortunately, the current trend clearly remains negative with prices below all of their major moving averages and their descending Upper Trend Line.  There currently are support levels at prior intra-day lows at $97.81, recorded on Oct. 25, 2006; and $97.09, hit on Aug. 14, 2006.  Nearest overhead resistance is found at $97.97.