Cummins (CMI) gapped to the upside this morning and the volume today is likely to be heavier than normal. This strength puts CMI in a strong position to break (on a closing basis) the 2014 peak around $160. The daily and weekly technical indicators were mostly headed in a bullish direction before today's gap, so profit-taking or attempts to fill the gap could well prove disappointing.
CMI is off its best levels of the morning, but prices seem to be finding interest around $160, which was the high of 2014. It is always interesting to see how a previous resistance level can reverse roles and become a support area when prices break the resistance. A few weeks ago we highlighted CMI and let's hope some readers of Real Money were buyers.
In this daily chart of CMI, above, we can see the rally from the late-June low. There are pullbacks and corrections about every other month along the way. The rising 50-day moving average line has a positive slope for much of the past 12 months and that certainly was the way to trade -- from the long side. A two-moving-average system would have kept you long, but if you just followed the 50-day average line you would have been in and out several times. The rising 200-day moving average line would have kept you bullish, but it would be late on the entry and the exit. The daily On-Balance-Volume (OBV) line generally moves higher from June to February but it is a pretty jagged path. The trend-following Moving Average Convergence Divergence (MACD) oscillator has been above the zero line (bullish) for much of the past 12 months. Last month, the MACD oscillator turned up from below the zero line for a cover-shorts buy signal and it just crossed above the zero line for an outright go-long signal.
This weekly chart of CMI, above, does not have today's price action. The indicators were bullish before today's strength. Prices were above the rising 40-week moving average line. The weekly OBV line has been rising since early 2016 and tells us that buyers have been more aggressive on this timeframe with heavier volume seen on weeks when CMI has closed higher. In the lower panel is the weekly MACD oscillator, which is above the zero line and close to a fresh outright go-long signal.
In this updated Point and Figure chart of CMI, above, we can see the fresh gains. The trade at $157.05 is a breakout and allows us to take the recent consolidation and project it higher for a tentative price target of around $200.
Bottom line strategy: Today's gap makes the risk parameters bigger in that a close below $148 would be our sell point. Buyers looking to add to longs should buy as close to $160 as possible. Our upside price objective for the third quarter is $200.