Caterpillar ( CAT) has surged sharply higher since late September. It has added a bunch of points to the Dow Jones Industrial Average (DJIA) and the S&P 500 but it's rally looks like it is in the bottom of the ninth inning.
Let's check the charts.
In the daily Japanese candlestick chart of CAT, below, we can see a strong run to the upside from late September. Prices made what western technical analysts would call a measuring gap in late October. Another gap is seen in early November and this may become an exhaustion gap as part of a downside reversal. We can see an upper shadow above $230 telling us that traders rejected the highs. The tight pattern of prices means we have a lot of new longs at a high price.
What does that mean?
It means that a small decline can put a large number of buyers at a loss. The trading volume peaked in late October and prices continued to rise as volume shrank -- not a good development. The slow stochastic indicator is making a lower high as prices made a higher high. This is a bearish divergence.
In the daily Point and Figure chart of CAT, below, we can see that the shares reached an upside price target in the $237 area. A trade at $224.71 or lower could put pressure on new longs.
Bottom-line strategy: Traders who are long CAT should take profits as the charts could soon turn lower.
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We are witnessing one of the most extreme disconnects in decades between the Nasdaq 100 and Russell 2000.
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