CAT’s Out of the Bag and It Doesn’t Look Good

by Serge Berger | July 25, 2013 1:14 am

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free Weekly Market Outlook Video here[2].

Caterpillar (CAT[3]) — This industrial machinery giant reported a 43% drop in its second-quarter earnings, which coupled with the company’s weak outlook, weighted on the stock yesterday.

Quarterly profits declined to $960 million versus $1.7 billion in the year-ago period. Revenue dropped 15% to $14.63 billion, falling short of analysts’ estimates of $14.93 billion.

Likely more concerning to investors was the company’s outlook. Caterpillar said it expects full-year 2013 revenue of $56 billion to $58 billion, down from its earlier forecast of $57 billion to $61 billion. Furthermore, the company cited weak global growth as a theme for coming years, which given Caterpillar’s global reach, is something to take note of. It also didn’t have anything particularly rosy to say about Europe, which differs from what other companies such as General Electric (GE[4]) had to say last week.

CAT Chart
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On the multi-year chart looking back to the 2009 lows, note that after a massive rally, the stock formed a double-top with highs in April 2011 and a re-test of those highs in February 2012.

Since the February 2012 highs, the stock has developed a series of lower highs within the context of a crucial up-sloping support line that currently sits around the $82 area. Also note that the stock’s 200-week simple moving average (red dotted line) converges somewhere around that area, and a significant close below there would constitute a break of major support.

CAT Chart
Click to Enlarge

On the daily chart, CAT is developing a head-and-shoulders pattern with a clearly defined neckline at the $80 level. While I am not a huge fan of head-and-shoulders patterns that stretch for more than a few weeks, just last week CAT developed another lower high that may just lead to it gaining downside momentum toward the $80 mark as a next leg lower before a bigger test of support.

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