Caterpillar Is in an Uptrend, but Be Wary of a Broader Market Correction

 | Jun 15, 2017 | 11:25 AM EDT
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I reviewed Caterpillar  (CAT)  back in March, concluding that, "CAT is likely to be vulnerable to headline shocks in the days and weeks ahead. Prices might erode further into the $90-$85 area but without a major top formation it is hard to envision much further downside."

In the following three months, we can now see that our analysis of Caterpillar Inc wasn't too bad. Prices were soft for the rest of March and did not break $90. In the chart, below, you can see that prices then turned up again in April with a gap to the upside in late April.

CAT is above the rising 50-day moving average line as well as the slower-to-react 200-day moving average line. The daily On-Balance-Volume (OBV) line has been moving sideways since March and does not add or subtract from the analysis. The trend-following Moving Average Convergence Divergence (MACD) oscillator, displayed in the lower panel, shows both a bearish divergence and a crossover "take-profits" sell signal.

Stepping back a little and looking at this weekly bar chart of CAT, below, we can see that prices are above the rising 40-week moving average line -- but not too far above it. Volume during the past year has been steady and there has been increased volume during the sharper run-ups.

The weekly OBV line recently moved up to a new three-year high, confirming the price advance. The weekly MACD oscillator has been in a bullish mode above the zero line since April 2016. The two moving averages that make up the indicator have begun to narrow a little, which could lead to a crossover depending on the price action going forward. An MACD crossover in the next few weeks could lead to a sideways period of trading for CAT.

In this Point and Figure chart of CAT plotting percentage changes, below, we can see the strong uptrend from the mid-$60s. A trade up at $107.61 will be a small, double-top breakout -- and could open the way towards the next potential upside price target of $122.83.

Bottom line: CAT is in an uptrend, and we have higher potential upside price targets, but we cannot ignore the possibility that the broader stock market could be vulnerable to a correction. While CAT has not made a huge run-up, like some of the technology companies I wrote about last week, it could still have a sideways correction or consolidation to test the patience of the bulls. Investors should consider raising sell stop protection to a close below $91.

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