Ahead of tomorrow's Non-Farm Payrolls report, markets are wound improbably tight.  Nerves are so much on edge that all that is needed is a teeny little push, and mortgage rates will give up their gains of the past few weeks.

If you're floating your mortgage rate, lock it in.  There is too much risk in the market today.

Mortgage rates are determined by the prices of mortgage-backed securities.  Like any other traded security, there is a supply factor and a demand factor that determines what the "going price" should be.

This "going price" is what determines mortgage interest rates for people like me and you.

Like any other security, there are global investors that buy and sell MBS to make a profit -- they don't really care how us and how our mortgage rates will change.  Their primary goal is to profit on changes in the MBS price.

One method global investors us make their buy/sell decisions is called Technical Analysis.  I won't get into Technical Analysis too much because the conversation may bore you to tears, but here is what you need to know:

Technical Analysis is based on trends instead of data.  Traders recognize patterns in the markets and then buy/sell in response.

There are a lot of technical traders in the markets and the more that there are, the more powerful their methods become.  For example, if technical traders buy on a trend, the price will increase, which leads to more technical traders buying on the trend.

It's a self-fulfilling prophecy -- as more traders follow a trend, it actually happens.

So, when we look at the chart to the right, we see an "M"-shaped graph of a hypothetical security.  This is called a "Double Top".

Starting on the left, we can see that the security rose in price until it hit a high-point, and then slid down.

On its way down, it hit a bottom ("neck line"), and then rose up again.

The key part on the chart -- and the part that interests technical traders -- is when the security reaches the previous high-point.

This is the point at which technical traders wonder if the security is in a Double Top and you can see what happens next.  The price of the security plummets.

If we were to chart the prices of mortgage-backed securities, it would look eerily similar to the Double Top formation.  Remember that bond prices move in the opposite direction of their yield.

In July and August,  prices were relatively low and then they rose in September.  After a brief stint at the high end -- Top #1 -- they returned to their previous levels, the Neck Line.

Now, mortgage bond prices are at September's levels and we are sitting at Top #2.  All it will take is a little bit of selling pressure for mortgage rates to jump through the roof, all the way down the "M" on the Double Top chart.

Tomorrow morning, the Bureau of Labor Statistics will release November's Non-Farm Payrolls report and markets are expecting 115,000 new jobs created.  If the actual figure is higher than 115,000, there will be selling pressure on mortgage-backed bonds because the fear of inflation will erode the bonds' value.

If that happens, the trend line will start moving down the "M" and technical trading will take over -- mortgage prices will move on down on the line, and mortgage rates will balloon.

I wrote it in the first paragraph and I'm writing it again now -- if you're floating your mortgage rate, it would be best to lock today to avoid the risk of the Double Top.

Source
Chart Patterns
2bull.com

http://www.2bull.com/learn/pat.htm

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Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.