Caterpillar Inc. (NYSE:CAT) shares lifted higher Tuesday, and as a result, CAT stock is looking incrementally more constructive since touching mid-March lows. The next important test? The construction equipment manager reports earnings next week (April 23) … and a post-earnings selloff or a rally could offer active investors a good spot to buy Caterpillar stock.
Earnings season is upon us, and particularly in the early innings, I like to look at stocks that have been trending lower for at least a few months, map out some technical levels (and other things to watch), and see whether post-earnings reactions set up a potential trend-change trade.
For Caterpillar stock, the going has been a struggle. CAT has been dealing with a large debt pile that has left its debt-to-equity ratio well above 200%, plus slow projected sales growth rates. Some analysts argue that this is a foreshadowing of a slowing global economy, while others blame it on poor cost control on the part of Caterpillar management.
Either way, CAT stock has been a big underperformer versus the broader stock market since last summer, and next week’s earnings report could go a long way in determining the next 10% to 20% move.
CAT Stock Charts
Looking at the multiyear chart of Caterpillar stock price action, we see that after a sharp rebound off the 2009 lows, shares topped out in April 2011. While those highs were retested and marginally overcome in early 2012, CAT stock has largely been stuck in a multiyear sideways trading range since.
At the same time, Caterpillar shares continue to hold support above the lower line on the chart, which acted as resistance until late 2010.
Looking at the daily chart, we see that CAT stock year-to-date continues to struggle. However, while Caterpillar reached a new multiyear low in March, downside momentum did bottom out in late 2014/early 2015.
With last Friday’s rally, CAT stock pushed back above its 50-day simple moving average (yellow line) for the first time since last November, but from much lower levels than last November and just near the multiyear support line seen on the longer-term chart above.
My suggested strategy? Let’s wait for the earnings report next week and see how CAT stock reacts.
It could be possible that the Big Cat just needs one more washout to the downside that brings it into the low $70s and marginally below multiyear support, where it then could begin to bounce. After all, at that point, both sentiment and price action would likely become extremely oversold. Upon a washout, I would then wait for a better bullish reversal to get long the stock, using the post-earnings lows as a stop-loss while looking for an upside target in the low $80s.
Alternatively, if CAT stock rallies after its earnings report, then it would in essence confirm the early March lows and the recent constructive price action. In that case, if the stock can get back above the $85.50 area, it would make a higher high versus its February highs. That could open upside toward the low $90s, where it could then bump into its 200-day simple moving average.
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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.
