There are a number of reasons why the iShares Barclays 20+ Year Treasury Bond Fund (TLT) may have found a bottom, for now. Although we don’t yet have a confirmation of a bottom reversal in recent price action, there are indications that the recent low was found in a strong potential support area. 

First, in mid-October 2010 TLT broke the neckline of a Head & Shoulders top formation. This pattern can be seen on the accompanying chart. Notice that the break of the neckline was at the same level as the high resistance creating the left shoulder on July 1, 2010. 

We can use a Head & Shoulders pattern to determine a possible target. By taking the difference between the top of the head, $109.34, and the price at the neckline on that day, $99.51, we arrive at $9.83. Then, take the breakout price at the neckline of $102.66 less the difference of $9.83 to get a likely target of $92.83. 

The low of Wednesday, December 8, 2010, was $92.11, close enough to $92.83 and an indication that the Head & Shoulders top is complete, as it has reached its target. This by itself is not enough to say strong support has been reached, so let’s go on. 

Next, we have horizontal support identified in the area of the recent low and confirmed multiple times historically as either support or resistance (support becomes resistance, resistance becomes support). You can see the blue arrows on the chart identifying some of these areas. The support zone identified is between $92.06 and $92.61. 

Third, there are two Fibonacci levels identifying support in the area of the recent low. The first measurement is of the retracement of the uptrend begun from the early April 2010 low of $87.30, to the high of $109.34, hit in late August (in purple). The 78.6% retracement level of that large trend is at $92.02, only $0.09 cents away from the low of $92.11. The 78.6% retracement level is not as common a Fibonacci level, but still very useful. 

Then, we have the Fibonacci extension of the recent retracement in the larger downtrend. This measure begins at the low of $93.81 begun from November 15 (in orange), up to the high of $99.27, hit November 30. The 127.2% extension comes in at $92.32. 

Finally, we have a Hammer bullish reversal candle on the day the bottom was hit. 

Summary:

1 – H&S target: $92.83

2 – Horizontal support: $92.06 to $92.61

3 – Fibonacci 78.6% retracement: $92.02

4 – Fibonacci 127.2% extension: $92.32

5 – Hammer bullish Candlestick

So, now we have five separate pieces of analysis indicating that TLT may have hit a strong bottom. Next, we need to watch it carefully for an entry with good risk/reward. (www.etf-portfolios.com)