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Caterpillar's Run Mirrors Best Buy

This column was originally published on RealMoney on Sept. 14 at 9:18 a.m. EDT. It's being republished as a bonus for readers.

The first thing I thought of as Tuesday began was how careful we need to be when stocks reach their target areas. The reason that thought was in the forefront of my mind was because I saw Best Buy's (BBY - Get Report) disappointing earnings release and recalled having calculated a target on that stock , in mid-June after the retailer surprised everyone with great earnings and the stock gapped higher.

I calculated a target on Best Buy around $70; of course that was on a pre-split basis, and on a post-split basis it would have measured to something in the $47 to $50 range. And there was Best Buy after yesterday's earnings shortfall, still in that area.

Right now the best thing that can be said about the chart is that it has support in the $40 area.

Having provided this background, I wanted to take a look at another stock that so far -- like Best Buy in mid-June -- has done absolutely nothing wrong, but is nearing its target zone. That stock is Caterpillar (CAT - Get Report).

If we take the pattern and measure it, we take the high of $50 minus a low of $41 to get $9. If we then add $9 on to the breakout level we get something in the $59 area. And here is Caterpillar in that area. Remember, the stock has done nothing wrong in here. It hasn't even backed off and made a lower high yet, but when a stock reaches its target zone, it tends to need either a long-term consolidation or a major correction.

As you can tell from the Best Buy chart this is not something that we can calculate in terms of time, just price. This is an exercise you should do so that if you own a stock you can attempt to figure out what price might be a good place to take a profit. It will also help you figure out if it's worth buying a stock once it's had a move.

For the market as a whole, I admit I thought yesterday's give-back was quite extensive, and more than I anticipated. It wasn't so much in terms of the market averages but more in terms of the breadth, which I did not expect to act so poorly into a decline. Breadth was poor all day, even as we headed into that midday rally. And that is not good.

What bothers me most about breadth is that the McClellan Summation Index will halt its rise if breadth starts to act so poorly. In fact, if we don't get an up day today, it will begin to roll back over. And that is concerning to me.

For now we are still in an overbought condition (having just reached it) and the high-low indicator that I highlighted Tuesday will likely roll over on Thursday of this week. Therefore, I am still expecting more on the downside as we head back to an oversold condition. In other words, if the market is up today, it doesn't negate these two indicators, which require more time (about another week or so) to work off their overbought readings.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

Click here for larger image.

Click here for larger image.

P.S. from Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.
Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.

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