Industrial stocks such as Caterpillar Inc. (NYSE:CAT) have spent the better part of the past few weeks consolidating. That’s bullish, in a way, as this could lead to a next leg higher given the current summer doldrums. Combine a “dull tape” and plenty negativity in CAT stock, and this could be a recipe for a continued ascent.
One of my old trading mentors used to always remind me not to fight “boring” stock markets, particularly during summer and in the final two trading weeks of the year. All else being equal, longer-term money allocators bring about a net-bid under any market. That is, without any meaningful near-term catalysts to focus on, markets naturally tend to meander higher.
Just remember: This kind of stock market can quickly morph into something more volatile, so especially in the dog days of summer, it pays to be vigilant.
When Caterpillar reported its latest second-quarter earnings on July 26, it missed analysts expectations and said that revenues dropped more than 15%. CAT also cut forward guidance for the year, and it cut costs, and it cut jobs.
Given investors’ increasingly short-term views, CAT stock was chased higher in hopes that the bottom line at least might not deteriorate much further.
CAT Stock Charts
All of this brings me to the longer-term chart of CAT stock. We see that after a sharp decline from 2014 down into this past January, Caterpillar has since rebounded back to a confluence area of resistance (previous support) that I marked with the blue bar.
The January lows coincided with a near exact 61.8% Fibonacci retracement of the entire rally from the 2009 lows up to the 2011 highs. The January lows may well have been an important technical low at the time, but it does not mean CAT can’t encounter another significant setback where it retests those January lows.
On the daily chart, we see that after the initial spurt higher off the January lows, CAT stock began consolidating this move from April through May. The May lows held the blue 100-day and red 200-day moving averages as support, then Caterpillar began its next leg higher. After the July earnings report, CAT stock then went on a two-day rally that measured more than 6% and took out the previous reaction highs from April in a convincing fashion.
Over the past couple of weeks, Caterpillar shares have once again slipped into a consolidation phase. This one could lead CAT stock to another rally toward the May 2015 highs in the high $80s.
A break and hold above $84 could trigger this next move higher in CAT stock.
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