Shares of industrial stocks as represented by the industrial sector of the S&P 500 have dropped nearly 14% since their September double top high. While this does not bode well through a multiquarter lens, in the near-term industrial stocks such as Caterpillar (NYSE:CAT) are increasingly looking oversold and soon ripe for an oversold bounce worth pouncing on.
Regular readers of my trading or investing ideas know that I am a big advocate of using something called “multi-time-frame” analysis. This type of analysis takes into account price movement of stocks, bonds, currencies or commodities in different time spans. More than anything this type of analysis allows market participants to constantly regain perspective on the market.
With global economic growth slowing for nearly twelve months now, I began telling my direct clients and subscribers in January 2018 that it will only be a matter of time until industrial stocks feel the heat of lower stock prices, or at the very least that those stocks look to be capped for the time being. Industrial stocks did see another rally in the summer, but by September they had formed a double top. The steep decline since is now a historical fact that I personally attribute at least to some extent to weakening global growth.
CAT Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To wit, industrial company Caterpillar has seen its stock price peak in January of this year and by September only managed to rally to a lower high. On the multiyear weekly chart we see that the recent sharp drop in CAT stock has now mean-reverted the stock back to a horizontal area of former technical resistance around the $110-$115 area. We note that this area also lines up with a 50% retracement of the entire rally from the 2016 lows up to the January 2018 highs. Furthermore, from a momentum perspective the stock is increasingly oversold on this weekly chart.
While none of this has to mean CAT stock will stop dead on its track and start rallying from here, in my eye the near to possibly intermediate term downside is now limited.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Moving on to the daily chart, we see that the recent sharp drop in CAT stock now also broke it below the descending channel it had until recently traded in. At the same time we see that the MACD momentum oscillator at the bottom of the chart is severely oversold. Furthermore, my proprietary “oversold indicator” called the “Vertical X Pro” indicator is also flashing oversold and saying that the rate of decline in the stock is not sustainable for the near-term.
The trade here is to buy CAT around the $112-$114 area for a bounce back up to $125, where it could then once again find technical resistance. More conservative traders will first want to wait for a bullish reversal to take hold before buying CAT stock for a trade.
Options traders may consider selling out-of-the-money put spreads using options expiring in December or later for an income trade.
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