ETF in Focus: IEF

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau for ETF Digest

NEW YORK (ETF Digest) -- IEF(IEF), the iShares 7-10 year Treasury ETF, has been forming an immature balance area in the weekly time frame. Tuesday, Sept. 6, 2011, IEF gapped up to a new 52-week high and closed down on the day. I marked this with a grey oval on the Daily chart below.

In Japanese Candlestick Analysis, today's price action on low volume formed what is known as a "spinning top." A spinning top candle shows buyers and sellers becoming more balanced, and being that IEF was making the initiative move to new 52-week highs -- this "could" indicate that the trend is losing steam. I am very hesitant to short here with the responsive trade due to the fact that the prior trend is up, and the path of least resistance is clearly higher. However, from an Auction Market Perspective, trading off the extreme of the balance area is a "low risk" trade.

The market has found value currently in this range for a few weeks. Price discovery at higher levels was initially rejected. The stop is now placed above the high of the extreme, only after we have seen some fizzle on a failed breakout, and you then target the opposite side of the balance area normally. The responsive trade will typically retrace the width of the balance area in a fraction of the time it took to form it.

Low risk also means with the correct money management. Can your account handle being wrong 10 times in a row on a trade setup like this? I am not focused on "jackpot" here; I am focused on "positive expectancy" to the trading system over the long run. This has nothing to do with timing the top in bonds. Randomly selling something just because it is "too high" or trying to catch the high tick, is a recipe for disaster.

I would like to see IEF close today, Sept 7, 2011, below yesterday's low. I am planning on taking a very small position to the short side, with the intention of possibly adding to the trade "only" if we should get a breakdown of this weekly balance area that is forming, at approximately $102.50. At that point I will be setting my initial target at a prior support and resistance level of $97.50. The next target after that is approximately $92.50 which is the top of a prior mature balance area where there should be strong support.