It's not exactly time to run for the hills in shares of heavy equipment maker Caterpillar (CAT), but we're not far off now. CAT has been getting plenty of attention (and not the good kind) after lowering guidance, announcing a price hike, and cutting jobs from its factory line. But early signs point to more bad news for shareholders. That's why I'm recommending that you stay away from this stock.
Right now, CAT is in the early stages of forming a head and shoulders top, not a particularly good sign, especially since shares of the $56 billion firm are a lot closer to their near-term lows than their highs. The head and shoulders indicates exhaustion among buyers, so it tends to be a particularly difficult setup for longs to overcome.While CAT still hasn't formed its right shoulder, the trading implications are the same as long as shares fall through their $82.50 neckline. That's the signal the CAT is set to make a move lower. Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant." Don't get caught on the other side of shorts on this trade.
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