Caterpillar (NYSE:CAT) announced second-quarter earnings last week that led to a roughly 5% sell-off in the stock on Friday, July 21. Equipment sales in Asia andLatin America were solid, but higher input costs (steel and other raw materials) weighed on the company’s bottom line. And while Caterpillar’s earnings surged 44% on record sales, its profit outlook left something to be desired.
As a sector, the industrial stocks have flashed several longer-term warning signals as of late — divergence with the transports, as well as bearish chart patterns — but CAT stock still looks like an attractive setup here for those investors that don’t have to fall in love with a stock for multiple years.
On the weekly chart looking back to 2009, we see a clear uptrend that is still very much in place. The stock keeps retreating to this trendline for consolidation purposes, only to then work higher again.
The daily chart looking back to January 2011 shows how well CAT stock respects its 50-day and 200-day simple moving average (SMA). After holding as support until early May, the 50-day SMA (yellow line) then held as resistance until the end of June, and now again has a good chance to hold as support. The rising 200-day moving average (red line) also coincided with the longer-term uptrend (blue line) in mid-June, acting as solid support.
After the earnings announcement last week, the stock dropped 5% and landed right on its 50-day SMA and the 50% Fibonacci retracement line of the move off the June lows to the highs in early July. If the stock wants to move higher in the near term, then it should hold here and bounce.
The trade I see setting up is to go long near yesterday’s close of $105.65 with a stop near the 200-day simple moving average and a profit target at $117.
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