Don’t look now but Caterpillar Inc. (NYSE:CAT) stock is starting to percolate.
After being relegated to the “why bother” bucket for months on end, the action in CAT is becoming interesting enough to warrant a closer look.
We begin with a birds eye view of the weekly chart of CAT. As shown in the chart below the harrowing descent finally appears to be bottoming out at major support in the $80 zone.
This support level has halted each and every major decline in the feline for the past five years. The bulls have come out to defend their territory with tenacity once again. Provided Caterpillar stock can remain above this area, buyers have a green light.
The bull case becomes even more compelling when we drill down to the daily chart. First, the momentum of CAT’s downtrend has slowed as we’ve come into the $80 area. The slowing momentum is confirmed by the bullish divergence flashing in the RSI indicator.
Second, we’ve seen an uptick in high volume up days suggesting increased participation by buyers.
Watch for a breakout over the 50-day moving average near $82 which marks near-term resistance. That’s the time to strike for those waiting for more confirmation CAT is reversing trend.
Put Spread on CAT Stock
While a healthy recovery in Caterpillar stock would be ideal, we can structure an option trade to profit even if the stock stagnates.
Sell the May $75/$70 put spread for 55 cents. Consider it a bet CAT remains above $75 by May expiration.
The maximum gain is limited to the initial 55 cents and will be pocketed if the puts remain out-of-the-money.
The maximum loss is limited to the distance between strikes minus the net credit, or $4.45, and will forfeited if CAT falls below $70 by expiration. To minimize the loss, I suggest exiting if Caterpillar stock falls to the short put strike at $75.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
