CAT Digs Itself a Hole

by Serge Berger | October 24, 2013 8:45 am

beatthebell_185x185[1]Construction and mining machinery manufacturer Caterpillar (CAT[2]) reported its third quarter earnings Wednesday, missing on both the top and bottom lines. Earnings and revenue were also both down year over year, and the company slashed its full-year guidance, blaming weak global demand from mining companies for its products.

CEO Douglas Oberhelman is sure that demand will return … he’s just not sure when.  The uncertainty around this timing is not inspiring confidence among investors, who sold the company’s stock to the tune of 6.07% on the day.

On the multiyear chart looking back to 2009, CAT has a major support line in place since  August 2010.  This support line, currently around the $82.50-$84 area, was once again tested during Wednesday’s selloff. CAT has now tested this line about eight times this year — as I often say, the more often a line gets tested, the more violent its ultimate breach when it happens.

The stock now also trades below its 200-day moving average red line, which has continually offered as a rough area of resistance throughout 2013.  From this multiyear view, CAT is nowhere near a good enough place technically to be traded from the long side — and in fact looks much better on the short side, particularly should the aforementioned support line snap.

cat multi year
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Not surprisingly, Wednesday’s selloff came on massive volume, which at the margin begs for continuation selling in the coming weeks.  Essentially Caterpillar has traded within the confines of an orderly trading range since May, and Wednesday’s selloff came right after a pre-earnings rally on Tuesday. This goes to show how difficult it is to forecast how a stock will react after its earnings announcement — which is why I focus my trading during earnings season on stocks after they report and investor emotions begin to settle down.
On this daily chart, the stock also looks weak and very vulnerable to break below its multi-month support line (which is the same support line discussed on the multiyear above). This stock isn’t worth playing from the long side until it’s showing relative strength again.
cat daily
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here[3]. At the time of publication, Berger had no positions in the securities mentioned.
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