You can give feedback to the user by handling the DropInfo event and check for the DropPossible / DropImpossible status. There you have access to the DragCue that you set when the drag started.
You can add and remove objects to the DragCue and the ArrowCue. For example you can change the background color of the arrow to red/green depending on when the drop is possible or not. You can set any control as the DragCue (I often use DragDropManager.GenerateDragCue() but only because it is quick). You can even add a user control there, with images, text and whatever you need.
This may be the easiesrt way to add feedback. You have access to the TreeView item as well but it may be best not to try to add/remove visual items from it while dragging. This will help keep the drag/drop handlers more generic as well.
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