Bonds are due for a pullback--here's why: Trader

The bond market took a breather Thursday as equity investors began to shrug off China concerns and strong U.S. retail sales showed a September Fed rate hike could still be on the table. And according to one trader, bonds will continue to selloff in the near term.

"Bonds have made a pretty substantial move higher in this recent pocket of volatility in the stock market," Todd Gordon said Thursday on CNBC's "Trading Nation." The TLT, the ETF that tracks longer-dated bond yields, is up nearly 8 percent from its low on June 26, while the S&P 500 is down less than 1 percent in the same period. "I think the stock market is beginning to stabilize and that's going to set the bond market up for a little bit of a retracement." Bond prices and rates move inversely.

And looking at a chart of the TLT, Gordon noted that prior support has become a key resistance level around $125. "Up against that resistance level there's also a candle reversal pattern and that, to me, confirms the TLT could begin to change course," said the founder of TradingAnalysis.com.

Read MoreTreasury auctions $16 billion of 30-year bonds at a high yield of 2.880%

"The other indicator that I'm watching to let me know a pullback is upon us is the relative strength index," said Gordon. Technicians often look at the relative strength index to detect where a stock, or in this case ETF, is heading based on recent trading. "We have a pattern of three lower lows in the relative strength index as prices made three higher highs," he said. "That tells me there is a momentum divergence."

Gordon believes the TLT could drop as much as 5 percent in the near term. It was around $123 in late trading Thursday.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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