This post is to describe just what is meant by the term technical that I frequently use here. As you may know, the interest rates that mortgages are set by are set on the open market — investors around the world either buying US Treasury notes/bonds (which demand will raise the price, and thereby lower the interest rate yield) or selling them (which will raise interest rates.) But it all trades on an open market.
As an aside story, there are some who think the “market” is a bad thing — with accusations of money-hungry investors. But this is first untrue; and secondly, a very needed service: the “open market of flow” is the thing that stabilizes the market: Based on breaking unfolding news and expectations, thousands of people will line up on one side and the other of expectation; and with that many people weighing in with financial opinion, the market seeks it’s true level — thus stabilizing for all of us, on a continual basis.
But the market itself tends to trade on two areas of thought: Fundamental, and Technicals. Fundamental analysis is that data that are the financial realities: how much is the company earning? What are the expenses; expected sales, etc? All the things that attempt to guess what is the true dollar value of that stock.
Interestingly, however, a whole other area of analysis has evolved that looks entirely at only the picture of the chart: Is it going up? How fast? Etc. Many mathematical models have evolved to describe these movements: Stochastics, MACD, Moving Averages, etc. Plus, there are indications even within the pictures: Head and Shoulders, Reverse Head and Shoulders, etc. At some point, I’ll try and find some pictures to put this up here; but in the meantime, as an example, a “Head and Shoulders” is where the graph will go up a bit, and down; and then up more, and back down to the original level; and then finally up only a little, and back down again. Such a picture is an indicator that the price is going down. And if you think about it, it makes a little sense: The market was trying to go up, and after three attempts, unsucceeding — and the expectation, based on this, is now that it will go down.
The market is affected by these technical analyses, in large part because they expect other traders to trade on this news. For instance, if you see a Head and Shoulders, you’ll be tempted to sell, simply because you believe other traders are about to put a run on for sale.
So, because of all of this, both of these things (Fundamentals and Technicals) drive the direction of a price — and prudent traders will look at both of them. It is for this very reason that I’ve begun to write more and more of what’s going on in the Technicals — so that you may have a bit better picture of what’s going on in the market, and where prices (in this case, interest rates) are expected to go.
At a future date, I may flesh out this post a little more to put specific detail in the footnote. Meanwhile, simply understand that there are two forces that move the market, and I will attempt to always discuss both of them in any consideration of rate movement, at this blog.
