Caterpillar (CAT) declined from June to September and was building a bottom formation into December. Prices rallied in January to cross above the popular moving averages but CAT quickly reversed direction and slumped back below the 50-day and 200-day averages.
Let's dig deeper into the technicals.
In this updated daily bar chart of CAT, below, we can see that CAT made lows in September and October and slightly higher lows in December. The On-Balance-Volume (OBV) line was stable in October/November/December and strengthened into January. The Moving Average Convergence Divergence (MACD) oscillator has moved up from the zero line and back to it as prices rallied and then fell back.
In this weekly Japanese candlestick chart of CAT, below, we can see a top reversal pattern at the beginning of January. Prices turned lower but show a lower shadow the past two weeks. The latest candle is a spinning top and could mark the beginning of a low as buying and selling is more in balance with the small real body of the spinning top.
The OBV line has been firm in recent months after a bullish rise. The MACD oscillator is trying to stay above the zero line.
In this daily Point and Figure chart of CAT, below, we can see a potential upside price target in the $265 area. A trade at $192 could weaken the chart.
Bottom line strategy: In our December 23 review we wrote, "Trade CAT from the long side. Purchases can be made at current levels and/or on strength above $210 and $220. Our price targets start at $241." The recent low on CAT is above the lows seen in December so I am still optimistic that CAT can strengthen once again. Use a stop at $189.
