A grizzly earnings report in Caterpillar (NYSE:CAT) is warning investors off and on the price chart that all is not well. And following a helpful and less-menacing dead cat bounce, it’s time for bearish traders to dig in with a well-placed short in Caterpillar stock.
Let me explain.
It has been a week since machinery equipment giant CAT stock announced a damaging profit miss and issued much weaker-than-forecast earnings guidance for 2019. Citing trade war tariffs and weaker demand from China, Caterpillar shares were bulldozed lower by more than 9% in the report’s immediate aftermath.
By the numbers, CAT offered adjusted earnings of $2.55 per share compared to Street views of $2.99. The profit miss was somewhat tempered by in-line sales of $14.34 billion which grew by 11% year-over-year. Still, at the end of the day, literally and figuratively, Caterpillar’s quarterly revenues proved no match for the company’s weak profit outlook of $11.75 to $12.75 per share versus estimates of $12.73.
To be fair, with U.S. markets clawing higher to their best levels in nearly two months by week’s end on items such as a temporary halt to the government shut-down, dovish Fed action and mostly better-than-feared earnings elsewhere, CAT did cut its immediate post-earnings loss by more than half and finished off 4.35% for the five-day period.
The price action in Caterpillar stock and more recent market supports may force traders to wonder about the difference that a week can make. The answer is that sometimes it makes a big difference. Since markets are cyclical, they’re known to abruptly shift directions often enough. However, I don’t think that’s the situation with CAT stock. Despite a substantial correction in 2018, I believe CAT shares are poised to move lower.
Caterpillar Stock Weekly Chart
Following six straight weeks of respite for the broader averages and what appears to be a dead cat bounce that has more or less filled an earnings hole on turf owned by the bears, it’s game on for a short in Caterpillar stock.
Bottom or squiggly-price line, shares of CAT have signaled a fresh lower high pattern on the weekly price chart slightly beneath the 200-day simple moving average. That’s bearish and should serve as a nice pattern entry set against resistance for traders willing to commit to a short in Caterpillar shares.
There’s more too. Following its own five-week-long rally, Caterpillar’s drop in price could be a canary in the coal mine, similar to its leading bearish action in 2018, and warning of more downside to come. For traders agreeable to shorting CAT stock, I’d recommend using a stop above $138.75. That currently amounts to risk of around 6%.
The amount of exposure with this short entry is manageable on a percentage basis, but it also serves to give bearish traders a bit of extra wiggle room above the recent high of $137.72 and longer-term moving average. This should help traders avoid getting shaken out of a position prematurely, while at the same time, not overstaying their welcome.
Disclosure: 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 options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
