I'm going to take a slightly different approach with a possible entry in Caterpillar (CAT). To set up the trade, I am using the same Fibonacci tools that are identifying a relatively wide support zone that comes in between the $84.02 and $88.16 area. If the current decline in CAT can terminate somewhere in this zone, I want to watch for a buy trigger to suggest it is worth placing a bet against this zone.
Since the potential upside target on this setup is $102.84 or higher at this point, I think we can have the patience to wait for a higher probability buy signal using the daily moving average crossover, rather than the 30-minute. Bottom line: Our maximum risk on this setup should be defined below the low end of the price cluster zone.
Besides the price analysis that suggests a possible low, I am also looking at a clustering of Fibonacci timing cycles that come due between March 15 and March 22. When we see a clustering of time cycles, the odds for a reversal of the trend are higher than usual. Since we are trading down into the time window, this also suggests an upside reversal in the coming week or so. If time and price match up, that would strengthen the trade setup. If it does not, I will still look for an entry as long as key price support is not violated.
Since the recent trend in this stock has been bearish, before I step up on the buy side for a swing trade, I want to use a daily moving average crossover using the 5/13 EMAs. It concerns me that in such a bullish market CAT is making a new low for the move. This is why I want to use a more conservative entry. To get an idea of what you want to look for, let's look at another daily chart with these averages.
On this daily chart, I am only illustrating the 5 and 34 EMAs and have labeled when they have triggered a buy entry in the past on this chart. Sometimes it worked nicely for a good move and other times the move did not last very long. There was even a failure. When you combine an indicator like this with Fibonacci time and price, the odds for success increase.
My strategy is going to be to wait and see if the price holds above the key Fibonacci zone and then I will look for the 5 bar EMA cross back above the 13 EMA on the daily chart. If that occurs, I will look at a bullish options strategy and base my risk against the low that is made prior to the daily buy trigger firing off.
If there is no trigger I will stand aside. If this setup is going to play out, we don't need to catch the exact lows to profit from the setup. I'll keep my eye on this one for you in the coming sessions.
