To some on Wall Street, an already doggish Caterpillar (NYSE:CAT) now looks deathly ill on the price chart. But in the world of investing where one-way streets, rarely if ever exist, contrarian-minded bulls should appreciate CAT stock for being in an opportunistic technical position to land on its feet and claw its way higher. Let me explain.
Some investors will obviously blame CAT stock’s weakness in recent months on steel tariffs taking their toll on the machinery giant. Other’s may point to management being cautious on the company’s prospects before the share price peaked as an indicator one of the market’s bellwether’s bull run was over before the fact.
Both arguments, which back Caterpillar’s tumble of just more than 20%, seem plausible in today’s market. But the reality is there are countless situations where similar supports ultimately fail to work and eventually get swept under the carpet. In fact I’d say that’s one of the very few consistencies on Wall Street.
Now the technicals in CAT stock are getting some investors excited in a bearish sort of way. This past week, shares signaled a death cross pattern as the 50-day simple moving average crossed below the 200-day simple moving average. It’s a rare bird in Caterpillar. In fact it broke the longest bullish trend-following streak in 46 years. Oh no!! Right??
My point is, if you’re a contrarian-minded investor who, like me, realizes only hindsight is 20/20 and investing is never a simple one-way street for bears or bulls, that same price chart in CAT stock is looks like a nice value proposition.
CAT Stock Weekly Chart
Bearish investors sensing more opportunity ahead in CAT stock due to the recent bear cross might also be eyeing a flag pattern that’s developed over the last few weeks. But there are two sides to every technical picture as our provided weekly chart also shows.
For investors willing to see Caterpillar’s decline as something other than a bearish harbinger of things to come, there is a decent support zone from around $125-$130 a share in CAT. The area holds a couple key Fibonacci levels from 2016 and 2017 and a key uptrend line.
This technical zone also represents a healthy and welcome correction of around 24% to 27%, the kind which all stocks eventually give way to before typically moving to new highs. CAT stock is also showing a sympathetic stochastics crossover in oversold territory and remains above its prior all-time-high from 2014.
Bottom line, investors are free to see Caterpillar as being in a bearish position. I get it. But as I’ve pointed out, the technical evidence also supports CAT stock as a name that’s approaching value territory and a potential long for your portfolio.
CAT Stock Moderately Bullish Combination Strategy
For investors agreeable with our bullish outlook for CAT stock, but who appreciate the risk of a nearby earnings catalyst, selling the Aug $130/$125 put spread to finance the purchase of a well-positioned moderately bullish Aug $140/$145/$150 call butterfly for a credit of around 15 cents looks attractive.
This spread combination puts traders in position to get long CAT below the market at a worst-case price of $130 while risking $4.85 — or less than 4% of the current share price of $136.82. And on the upside, seeing how Caterpillar has already built and achieved great feats the past couple years, a risk-free butterfly with a sweet spot 6% above the current price and up to $5.15 at expiration if shares landed on $145 looks about right.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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