Caterpillar (CAT) - Get Report set a multi-year low of $111.75 on Aug. 28 and I consider this a double bottom vs. the Oct. 29, 2018 low of $112.06. Given this observation, my call is to buy the stock down to its "reversion to the mean" at $115.14 and its annual value level at $114.11. This bullish call is backed by positive fundamentals. The stock is cheap with a P/E ratio of 10.74 and generous dividend yield of 3.43%, according to Macrotrends. If you believe that discussions with China on tariffs later this week will be positive, this trade is for you.
I use the 200-week simple moving average on its weekly chart as the technical "reversion to the mean."
The stock closed Friday, Oct. 4 at $121.04, down 4.7% year to date, and is up 8.3% from its Aug. 28 low of $111.75. The stock is consolidating a bear market decline of 30.1% from its all-time intraday high of $173.24 set on Jan. 26, 2018. The stock had a huge bull market rise going into 2018 on the hype of pending infrastructure spending, then hit the brakes on a slowdown in construction spending and the trade war with China. A positive to consider now is the turnaround in the housing market.
Caterpillar is a component of the Dow Jones Industrial Average and its dividend yield of 3.43% will qualify the stock as one of the "Dogs of the Dow" in 2020.
The Daily Chart for Caterpillar
Courtesy of Refinitiv XENITH
The daily for Caterpillar clearly shows the bear market decline from the Jan. 26, 2018 all-time intraday high of $173.24. This decline of 30% has been consolidating since the low of $112.06 set on Oct. 29, 2018. The close of $127.07 was an important input to my proprietary analytics. Still in play on the chart is its annual value level at $114.11, which held at the Aug. 28 low of $111.75. The close of $136.29 on June 28 was another input to my analytics. The semiannual risky level for the second half of 2019 remains at $145.60. The close of $126.31 on Sep. 30 was the latest major input to my analytics. The fourth quarter risky level is $151.87 with the monthly risky level for October at $127.20. Note how the Oct. 29, 2018 low and the Aug. 28, 2019 low is a potential double bottom for the stock.
The Weekly Chart for Caterpillar
Courtesy of Refinitiv XENITH
The weekly chart for Caterpillar is negative with the stock below its five-week modified moving average of $124.19. It is above its 200-week simple moving average or "reversion to the mean" at $115.14, which was last tested during the week of Aug. 30, when the average was $113.48. The 12x3x3 weekly slow stochastic reading is projected to slip to 44.34 this week down from 46.74 on Oct. 4. Buying weakness to the "reversion to the mean" is usually a successful strategy.
Trading Strategy: Buy weakness down to its "reversion to the mean" at $115.14 and to its annual value level at $114.11. Reduce holdings on strength to monthly, semiannual and quarterly risky levels at $127.20, 145.60 and $151.87, respectively.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.
The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.
The quarterly level changes after the end of each quarter so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October as monthly levels change at the end of each month.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.