Caterpillar Needs Global Economic Recovery to Succeed
Caterpillar (CAT) - Get Report set its all-time high of $116.95 back in February 2012 and since then the company has been hurt by slowing global economic growth. This trend may have ended with a low of $58.81 set on Jan. 20, 2016.
The stock ended 2015 with the statistics that qualified the company to be one of eight "Dogs of the Dow" for 2016. As a component of the Dow Jones Industrial AverageI:DJI that was a big loser in 2015, but with a favorable dividend yield qualified the stock as a dog. Caterpillar has a dividend yield of 3.86% well above the yield of 1.58% for the 10-Year U.S. treasury note.
Since the Brexit low of $70.53 set on June 27, the stock is up 13% outperforming the 9% gain for the average. Caterpillar has an elevated price-to-earnings of 42 versus 19.6 for the Dow 30.
Analysts expect Caterpillar to earn 96 cents a share when they report before the opening bell on July 26.
Here's the daily chart for Caterpillar.
Courtesy of MetaStock Xenith
Caterpillar closed Wednesday at $79.69 up 17.3% year to date and is 41.4% above its Jan. 20 low of $56.36.
The stock has been above a "golden cross" since April 18 when the 50-day simple moving average rose above the 200-day simple moving average. This signal indicates that higher prices lied ahead. The stock closed that day at $79.25 and additional shares could have been bought on weakness to the 200-day simple moving average at $71.04 on May 9 and at $70.59 on June 27. The stock set its 52-week high of $81.00 on July 14.
Here's the weekly chart for Caterpillar.
Courtesy of MetaStock Xenith
The weekly chart shows a red line through the price bars, which is the key weekly moving average (a 5-week modified moving average). The green line is the 200-week simple moving average considered the "reversion to the mean." The study in red along the bottom of the chart is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicates overbought and readings below 20.00 indicates oversold. A negative weekly chart shows the stock below its key weekly moving average with weekly momentum declining below 80.00 in a trend towards 20.00.
The weekly chart for Caterpillar is positive with the stock above its key weekly moving average of $76.90 and well below its 200-week simple moving average of $86.12. The weekly momentum reading is projected to rise to 68.69 this week up from 60.23 on July 15.
The horizontal lines are the Fibonacci retracement levels from the all-time high set on Feb. 2012 high of $116.95 to the 52-week low of $56.36 set on Jan. 20, 2016. The stock is on the cusp of the 38.2% retracement of $79.42. Above is the 50% retracement of $86.58, and below is the 23.6% retracement of $70.55.
Investors looking to buy caterpillar should consider doing so on weakness to $71.22, which is a key level on technical charts until the end of July.
Investors looking to reduce holdings should consider selling strength to $81.62 and $85.65, which are key levels on technical charts until the end of 2016.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.