How to Trade Caterpillar Inc. (CAT) Stock Around Q1 Earnings

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cat stock - How to Trade Caterpillar Inc. (CAT) Stock Around Q1 Earnings

Shares of industrial stock Caterpillar Inc. (NYSE:CAT) are higher by just about 2% for the year-to-date, and it’s hardly in a straight line. While CAT stock rallied about 18% between the election and its February highs, the company has largely struggled since federal authorities raided its offices in early March.

Beat the Bell: Caterpillar Inc.Through a multimonth lens, Caterpillar shares are largely consolidating — and awaiting another catalyst for its next directional move. Of course, Caterpillar is scheduled to report its next batch of earnings Tuesday morning, so that could well be the next trigger that investors are waiting for.

Before looking at the possible trades setting up for CAT stock following this week’s earnings report, let me make an important point about such post-earnings trades:

Not infrequently, stocks stage significant up or down gaps following their reports. This price action often can be a meaningful statement on the part of investors, and it can have a lasting impact on the intermediate- and even longer-term. Most moves typically take place if the company reveals a significantly better or worse forecast than what investors had previously “baked” into the shares. However, in my experience, these moves are best judged after a stock actually closes a full trading session materially higher or lower after the earnings report.

In other words, don’t chase the immediate price action in the first minutes or even hours following an earnings report. Let emotions simmer, and then you’ll get a truer idea of the situation.

With that in mind, let’s go to the charts.

CAT Stock Charts

We begin with the multiyear view, where we see that after a sharp rally off the financial crisis lows in 2009, Caterpillar shares began to stall out in spring 2011. This was followed by a double-top formation in early 2012.

CAT stock chart weekly view
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By January 2016, CAT stock had fallen 50% from those highs but also found support at the 61.8% Fibonacci retracement line, measured from the move from the 2009 lows up to the 2012 highs. This is a last-resort support area that I like to focus on.

The fact that this line held in early 2016 so far remains a positive sign.

On the daily chart, we see that the initial up-gap and rally following last November’s U.S. election results quickly moved CAT stock to the upper end of its uptrending channel (purple-dotted parallels).

CAT stock chart daily view
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While there were a few more percentage points to be had on the upside in the second half of January, the early December highs were just barely overcome before CAT slipped back lower and back and forth in the blue trading range on the chart.

Since March, Caterpillar is once again trading near the lower end of this year-to-date trading range. This end also coincides with the uptrend support line from January 2016.

The way I see it, there are two moves following Tuesday’s report that would be meaningful enough to merit a reaction from traders and investors (both on a daily closing basis):

  • A break-and-hold below $90
  • A break-and-hold above $99.50

If it’s the former, this could lead to an initial move lower into the mid-$80s. If it’s the latter, this could lead to a move into the $108-$110 area.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/04/how-to-trade-caterpillar-inc-cat-stock-around-q1-earnings/.

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