U.S. Treasury Bond ETF on Thin Ice

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

NEW YORK (ETF Digest) -- The iShares Barclays 20+ Treasury Bond(TLT), an exchange-traded fund that tracks Treasuries, is skating on thin ice.

A head-and-shoulders pricing pattern developed on the daily chart of TLT recently. A head-and-shoulders pattern shows a gradual overcoming of supply vs. demand, and it can have serious implications when it appears at the end of an uptrend.

Back in late 2011, you can see the beginning of this formation (noted with blue letters) as the price of TLT attempted to move higher. When a neckline is broken off the lows between the two shoulders, it is a signal that a change in trend may be taking place.

The measured rule for a profit-taking target on a head-and-shoulders pattern involves measuring the distance between the top of the head to the neckline and then adding that onto the breakdown point. The risk or stop-loss is above the right shoulder. The probabilities are good from a reward to risk perspective.

The problem for the bulls is that should this pattern get fulfilled, it will also be breaking a prior "support" level. Support is where market participants previously thought price was too low. Will there be demand for TLT this time again?

There are two gaps on the chart that I noted with blue ovals. Gaps happen when a market opens in the morning at a higher price than where it closed the previous trading day and fails to return there.

Gaps have a tendency to fill and are targets for traders. Once the support level I noted fails to hold, these gaps will be in play. The smart money bulls will typically step aside once support is broken, and admit defeat in the short term.

Looking out on the horizon, should TLT keep heading south, there is what I call an air pocket below. An air pocket develops when price spends a relatively small amount of time trading in a particularly large range.

This could lead to very sharp and explosive moves downward much like what happened on the way up. The next logical stopping price would likely be the major support level I noted on the chart.