Caterpillar's Metamorphosis

Caterpillar (CAT) led the Dow Industrials and broad market through all of the first quarter but has run into considerable headwinds in recent weeks. Chinese fiscal tightening policies and the European debt crisis have combined to knock this leadership issue down to earth after it struck an 18-month high on April 26.

While the stock is likely to head lower as we head into the summer months, the long-term chart may set up a dramatic buying opportunity that kicks into gear in the third or fourth quarter. This is great news for patient investors willing to wait until the stars line up perfectly, offering an entry price at a major low ahead of a long and fruitful uptrend.

Caterpillar (CAT) -- Monthly Source: eSignal

Caterpillar entered a historic rally phase in the early 1990s, when the collapse of the military-industrial complex opened all sorts of international growth opportunities. The uptrend peaked in 1997 near $30, giving way to a six-year trading range that was finally broken to the upside in 2003, right at the end of the tech-driven bear market.

A second rally wave then unfolded in five major impulses, reaching the low $80s in 2006. The stock stalled at that price level and carved out a massive triple-top pattern that broke multiyear support near $60 in 2008. The subsequent decline was brutal, with price losing nearly two-thirds of its value in the next six months.

The vertical downtrend reached support at the top of the six-year trading range in February 2009, probed under that level for two months (red circle) and then lifted higher in a "V"-shaped recovery that returned to the broken top in November. It paused for five months and then remounted this major resistance level in April (red box).

The final surge through that resistance level ahead of the May downswing offers insight into Caterpillar price action from now into 2011. In a nutshell, the breakout opens the door to a test at the all-time high at $87, posted back in July 2007. But patience is required because there's plenty of time and space between those big monthly price bars.