Caterpillar Stock Sets Off Buying Signals

Dow component Caterpillar Inc. (CAT) has broken out above a three-month trendline and could challenge January's bull market high in the coming weeks. The most reliable entry in this technical scenario may come on a pullback to new support near $150 rather than jumping in blindly, hoping momentum carries the position into a profit. As a result, a review of key price levels could be useful in getting the most advantageous trade execution. 

This cyclical security has performed poorly so far in 2018, losing more than 2% since the first trading day of January, with the political drumbeat of tariffs and trade wars capable of derailing an impressive multi-year growth track. It rose nearly 70% in 2017, marking the strong annual performance since the heavy equipment giant dug out of a deep hole following last decade's bear market.

A stronger trend move might need to wait until April 24, when the company is expected to report fiscal third quarter earnings per share of $2.09 on $12.1 billion in revenue. The full-year outlook could have a greater impact on price action than quarterly metrics, with executives forced to comment on the company's massive China footprint and the potential impact of a trade war. (See also: Will Caterpillar Stock Break Down From Descending Triangle?)

CAT Long-Term Chart (1993 – 2018)

The stock cleared 1987 resistance at $9.34 in 1993 and entered a powerful uptrend that continued into 1997, when it topped out in the lower $30s. The 1998 and 1999 breakout attempts failed, generating a steep downtrend that found support at $14.50 in the third quarter of 2000. That marked the lowest low for the next 17 years, ahead of a steady uptick that generated strong buying momentum through the middle of the decade. 

The rally stalled in the lower $80s in 2006, giving way to a triple top pattern that broke to the downside in September 2008. The stock lost two-thirds of its value in the next six months, coming to rest near $20 in March 2009. It took just 20 months for the subsequent recovery to reach the prior high, triggering a breakout that topped out above $116 in 2011. Price action then entered a long period of sub-par performance, grinding sideways to lower for the next five years.

The January 2016 low marked a historic buying opportunity, with the subsequent uptrend breaking out above 2011 resistance in September 2017. It posted exceptional gains into January 2018, hitting an all-time high at $173.24 and turning sharply lower with the broad market, which got spooked by tariff and trade fears. The April 4 low at $138.05 tested the 200-day exponential moving average (EMA), raising the odds that the intermediate correction has now come to an end.

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CAT Short-Term Chart (2017 – 2018)

The sequence of lower highs since January has carved a trendline with resistance now aligned at the 50-day EMA near $150. The stock broke out above that level earlier this week and traded up to $155.54 in Tuesday's session. Short-term overbought signals are now going off, suggesting that the rally wave will fizzle out and generate a pullback that tests new support. That technical event could offer an excellent entry, ahead of a trip back to the January high in the $170s. 

On-balance volume (OBV) topped out in 2011 and entered a brutal distribution wave that continued to post lower lows into the start of 2016. Buying pressure since that time has been impressive, but the indicator still hasn't reached the prior high. It topped out once again in January 2018 but bottomed out quickly, with committed buyers returning after the deep slide through $140 earlier this month. This reversal bodes well for bullish action in coming weeks. (For more, see: Caterpillar: 6 Things You May Not Know.)

The Bottom Line

Caterpillar has mounted a three-month trendline, establishing new support at $150 that could offer a low-risk buying opportunity during a pullback. (For additional reading, check out: 9 High-Return Stocks for a Shaky Market: Goldman.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>