Caterpillar Inc. (NYSE:CAT) stock is higher by about 30% year-to-date in an impressive rally for the industrial giant in the face of a still-slowing global economy. However, while Caterpillar stock doesn’t have to fall off a cliff here, the rally has pushed CAT shares into a more meaningful area of resistance.
The path of least resistance is lower.
When I last offered a trade idea on CAT stock on Aug. 15, I mused that Caterpillar looked to be coiling up for another leg higher. My upside target at the time was in the high $80s. Well, last week, CAT shares reached that upside target, and I plan to take profits in this trade.
Trading and investing is all about time frames. The unfortunate reality is that most investors and traders don’t have the appropriate perspective before entering trades, and thus don’t have adequate risk management in place. Here, I always provide two charts in two distinct time frames to help readers gain that insight and perspective.
Caterpillar stock, after last week’s rally, is a prime example of a stock that must be evaluated over multiple time frames. Otherwise, you risk chasing higher a stock that, longer-term, has reached a potentially important technical resistance area.
Caterpillar Stock Charts
CAT bulls point to the 3.5% dividend yield, which should still look attractive relative to bonds. Bears, on the other hand, see that global economic growth is less than rosy. They also point to the below multiyear chart, where Caterpillar clearly is dealing with technical resistance (marked by the black diagonal line).
Note also that the red 200-week simple moving average has been a fairly good line in the sand for intermediate-term support and resistance over the past few years. Caterpillar stock last week pushed back above this line, but one week does not make a new trend, so it still has to establish itself above there.
Either way, even if this is just a pause, CAT stock isn’t worth chasing right here and right now.
On the daily chart, note that albeit constructive in the process, the entire rally off the January lows may also be looked at as a rising wedge pattern as marked by the black lines. Last week, CAT stock marginally overshot this pattern, and on Tuesday, my “B2 Reversal” indicator flashed a “sell” signal, which I marked with a red down arrow.
Investors long Caterpillar stock could use this spot to lighten up on some long positions. Less risk-averse traders could look to play CAT shares from the short side against the $89-$90 area, using a first downside price target in the $85 area.
Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! Download Serge’s Free Special Report: 6 Keys for Successful Trading and Investing.
