| What is a Japanese Candlestick Chart? |
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A candlestick chart is another way of charting daily price movements for a given security. Until the late 1980s candlestick
charts were relatively unknown in the US, being a mainstay in Japan since the 1700's. Candlestick technical analysis has become
a mainstay for serious technicians since early 1990. Until then no wire service or news service offered Candlestick charts making
it difficult for technicians to create them; since then every charting service and news service now offer Candlesticks along
with the traditional bar charts. There are many newsletters and internet sites today capable of creating Candlesticks; but
what is not widely used is the actual technical factors used in conjunction with the charts. A candlestick chart is no different
than the traditional bar chart; both show the trading range for the day, both show the open price and the close price. The top
or bottom of the Candlestick shows the open or close. The color of the candlestick represents the color for an up or down day
(green usually meaning up and red signifying a day when prices that close lower than the previous day). The wick (vertical
line in the center of the Candlestick) simply shows the high and low for that trading day or period. Japanese Candlesticks are
thought to be easier to use than traditional bar charts because they present a clearer "picture" of general rate movement
and volatility.
What is a rolling, or moving average?
Moving averages are simply the average price of a particular market over a measured number of days. Individual technical traders
have their favorite averages depending on the speed (or smoothing) they like when comparing a current price (or yield) to a
specific average period. Averages are widely used and followed by most in the markets, it doesn't take much technical analysis
training to use a moving average and should always be checked when making an investment or trade. If the daily price exceeds
its stated Moving Average (MA) that is considered bullish; trading below its stated average, bearish.
What are support and resistance levels?
Bar charts or candlestick charts are visual pictures of market movements everyday over time. Technical traders look for areas
that in the past where a market found support or resistance, using that information as areas to be closely monitored. The theory
is that where prices changed directions in the past may be areas where they will once again find support or resistance. Not
infallible (as fundamentals do change over time), but near term support and resistance levels are quite useful; where prices
failed previously it is likely they may fail again at those levels. and where stop loss orders accumulate. So to capsulate:
While sometimes fallible, observing Support and Resistance levels can be likened to ceilings and floors over a given time period.
Potential Reprice Indicator – the picture that says it all!
Potential Reprice Indicator (PRI) is the most useful tool on your MBS Tracking screen. It’s the easiest way to see how live MBS movements might affect total lender re-pricing on a given day. The way it works is simple. It converts total security pricing movement to an approximate lender pricing equivalent. For example: If the default FNMA coupon price worsens by 25 basis points (meaning rates have increased), this translates to roughly a .25 fee increase in lender pricing. So it makes sense that if a lender were to re-price, they would likely post a total price increase of .25 in fee. All lenders have different re-pricing strategies but the PRI is a useful tool in gauging the amount of total potential re-pricing each day for a lender who issued morning pricing at the time of your AM Tracking Quote. Once again, the AM Tracking Quote is your most critical setting in your Alert Controller! Most lenders re-price at 9:30 EST. But if you really want to dial in your PRI, adjust your AM Tracking quote to follow the pricing habits of any lender you wish.
What is an RSI Chart?
The Relative Strength Index (RSI) below the Candlestick chart is simply a comparison of market strength today compared to a set
number of days in the past. It's a "momentum oscillator" that measures velocity of directional price movement over a specified
period. Basically, it tells you whether or not the current trading on a given commodity is overly bearish or bullish. The RSI
was developed by J. Welles Wilder. He first spoke of this system in a book called New Concepts in Technical Systems which was
released in 1978. The RSI compares the magnitude of a commodity (in our case a MBS's) recent price increases to the magnitude
of its price losses. From there a number is derived between 0 - 100 to distinguish that comparison. For mortgage origination
technical characteristics we use a 9 day oscillator, or RSI. It could be 14 days, 21 days or any number of days depending on
a traders preference and time frame; the more days used in the calculation the smoother the index, but mortgage originators
should use a shorter rather than a longer time frame as escrows are very short term market timeframes. Here’s how to create the index:
RSI = 100 -
100
1+RS
Average all the closes higher, average all the closes lower in the time frame then divide the up days by the down days to get
the RS then apply it to the formula above to get the actual RSI index.
Using the Rate Alert RSI
Rather than focusing in the math behind the RSI, it's much easier to understand just by looking at it and observing. Beforehand,
here are a few things you need to know:
- Overbought - In our opinion, a bond is overbought if the RSI shows a level above 80.
- Oversold - A bond is oversold if the RSI shows a level below 20.
- The Centerline for RSI is 50. -Understanding the main concept is very simple. If the bond is showing an RSI less than 50
we can say that the average price decreases are greater than the average price gains (i.e. bearish). With RSI above 50 we
can say that the average increases are greater than the average decreases (i.e. bullish).
So, when looking at the above RSI chart of the FNMA 4.50 Bond, we can see in January how the RSI moved above 80. The bond then
created a negative divergence as you can see in the blue over the next week and a half or so. It soon turned quite bearish overall.
The Bond then lost its momentum and sold off, creating an RSI of 50; eventually being technically oversold below 20.
Closing Notes
The RSI is a great technical indicator to utilize once you get the hang of it. It can help you make short term decisions for
your unlocked pipeline as an additional technical indicator of how bullish or bearish the trading is on a particular coupon.
