Shares of industrial machinery giant Caterpillar (CAT) rallied close to 5% Thursday after the company reported upbeat earnings and raised its guidance for fiscal year 2014. However, in the bigger picture, CAT stock is approaching an important area of technical resistance that could allow active traders and investors to play shares on the short side.
Caterpillar earnings for Q3 came to $1.72 per share on an adjusted basis, beating analyst estimates for $1.36. Revenues of $13.55 billion also came ahead of the Street consensus of $13.37 billion. That’s 20% year-over-year EPS growth on a slight sales improvement of 1%.
CAT stock holders also welcomed Caterpillar’s upbeat outlook for the rest of 2014; EPS guidance was raised from $6.20 per share to $6.50, easily clearing the analyst bar of $6.26.
Caterpillar — given its global exposure to mining, building and other core industries — often is looked to for clues to global and regional economic growth. Well, Thursday’s earnings report likely caught some bears off guard, causing not only short covering but also some performance-chasing funds to add the stock back to their portfolios.
CAT Stock Charts
Looking at CAT stock from a multiyear weekly perspective, we note that in July, shares formed an important lower high against their 2011 and 2012 double top. Furthermore, while the stock from a momentum perspective topped in May, price continued to rise into July, forming negative divergence that then pushed the stock lower in September and early October. Caterpillar stock also has a clearly rising neckline (black line) that in the medium term stands a good chance of being revisited.
To put Thursday’s 5% rally into perspective, note that on the daily chart, this week’s movement has merely brought CAT stock back toward a layer of horizontal resistance, which previously acted as support (until late September). In early September, CAT stock also formed a marginally lower high against its July highs, from which the downside move quickly accelerated. In the meantime, the stock’s medium-term moving averages (50 and 100 days) are pointing lower.
The confluence resistance area for the stock around $100-$102 is made up of its 50- and 200-day simple moving averages (yellow and red lines, respectively) as well as the aforementioned horizontal resistance.
In the immediate term, it’s possible that CAT stock will see some follow-through buying. However, the weakening bigger picture coupled with the confluence resistance zone (blue circle) now offers active investors and traders a defined area to lean against for a trade in the stock.
Watch out for bearish reversals (failed intraday rallies) to occur in coming days in the $100-$102 area, for a move back toward $92.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
