by Serge Berger | March 26, 2014 8:27 am
Industrial machinery company and Dow component Caterpillar (CAT) rose 1.80% on Tuesday on the back of optimism that its Senate hearings scheduled for April 1 won’t throw the company under a bus.
Let’s take a look at the recent history … and more important, what this development could do for CAT stock in the near term.
On Monday a U.S. Senate subcommittee scheduled the April 1 hearing for Caterpillar to look closer into the company’s handling of offshore income and taxes. The U.S. government is going after tax evaders or tax optimizers, ranging from wealthy individuals with offshore bank accounts to large U.S. corporations with big foreign cash reserves. Caterpillar in 2013 had two-thirds of its revenue come from outside of the U.S., and thus falls right into the category that the government wants to look closer at.
Before flipping through the charts, let me be clear that while Tuesday’s price action was bullish for CAT stock, considering the marginally slowing acceleration of U.S. economic data of late I am not willing to lean out of any windows just yet. In other words, the current long-side trade in CAT stock that I am spying is just that — a trade, not to be mistaken with any longer-term call on CAT stock.
Given CAT stock’s importance, I always keep it front and center on one of my eight trading screens. Over the past six to nine months I noticed that many macro fund managers and analysts have been calling for CAT stock to fall into the abyss, particularly last summer and autumn when CAT stock once again danced on the support line on the below chart.
But it wasn’t to meant to be, and after one more test of support in November CAT stock began to climb again, reaching the upper resistance area in the high $90s in mid-February. At that point CAT began to digest its three-month rally and settled into a fairly tight sideways pattern, which ultimately resolved to the upside with Tuesday’s breakout rally.
From a technical and psychological point of view the price action in recent weeks is very straightforward and encouraging. After reaching buyer exhaustion in mid-February, CAT stock began to consolidate just underneath its early-2013 highs and took the shape of a bull flag. Tuesday’s rally led the stock to break out of this bull flag — so there’s plenty of upside for CAT stock. A traditional target price measurement now points CAT stock to move toward the $110 mark over coming months, which would be more than a 10% move.
For my part, as discussed above, I believe Tuesday’s breakout in CAT stock is worth a try on the long side, but I am going with a more conservative upside target near $104 for now. As always, risk management takes the front seat, so if Tuesday’s rally should get reversed in coming days, then CAT simply wasn’t yet ready to break higher in a more meaningful fashion.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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