Caterpillar Guidance Sends Stock Below Annual Pivot - Here's How to Trade It

Buy Caterpillar on weakness to its quarterly value level at $121.54 and to reversion to the mean at $121.24. Its annual pivot at $134.44 should remain a magnet.
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Caterpillar  (CAT) - Get Report beat fourth-quarter earnings-per-share estimates after missing the Wall Street view in three of the previous four quarters. 

The stock on Friday traded lower on cautious guidance. 

Shares of Caterpillar traded as low as $131.29 Friday morning, then rebounded to their annual pivot at $134.44 and 200-day simple moving average at $133.65. 

The stock thus stabilized as the broad market swooned on the coronavirus scare, but it slipped back below its annual pivot at $134.44..

My call is to buy Caterpillar on weakness to its quarterly value level at $121.54 and to its reversion to the mean at $121.24. Its annual pivot at $134.44 should remain a magnet.

Global economic uncertainty is the theme for this Dow Jones Industrial Average component. Weakness in 2019 was within each corporate segment: construction, resource equipment and energy and transportation sales. Here’s the detailed earnings analysis as reported by TheStreet.com.

The stock is cheap fundamentally with a price-to-earnings multiple of 12.4 and a dividend yield of 3.03%, according to Macrotrends.

At this morning’s low the stock was down 11% year to date and was in correction territory 13% below its Jan. 2 high of $150.55. 

Even so, the stock is 18%  above its Aug. 28 low of $111.75.

Longer term the stock is consolidating a bull-market run. CAT stock more than tripled from $56.36 in January 2016 to its all-time high of $173.24 in January 2018. 

The stock then declined by a bear-market 35% to $112.06 in November 2018. CAT then rallied by a bull-market 29% to a high of $144.77 in April 2019. 

Next came a bear-market 23% decline to $111.75 during the week of Aug. 30. The latest move from this low was a bull run of 34% to its Jan. 2 high of $150.55.

This past volatility provides a road map that can be followed to capture a portion of future share-price volatility. Here’s how to do so using daily and weekly charts and levels from my proprietary analytics.

The Daily Chart for Caterpillar

The Daily Chart For Caterpillar

The Daily Chart For Caterpillar

Courtesy of Refinitiv XENITH

The daily chart for Caterpillar clearly shows the bull market run of 34% from its August 28 low of $111.75 to its Jan. 2 high of $150.55.

The 2019 close of $147.68 was an important input to my proprietary analytics. 

The annual value level of $134.44 was violated at this morning’s low but was a pivot (or magnet) in early post-earnings trading. 

The semiannual risky level for the first half of 2020 is above the chart and appears unreachable at $182.70. 

The monthly value level for January at $129.68 rolls off the chart next week as today’s close will result in a new monthly level for February. 

The first-quarter value level is $121.54, which is the downside risk.

The Weekly Chart for Caterpillar

Thw Weekly Chart For Caterpillar

Thw 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 $142.22. 

The stock is above its 200-week simple moving average, or reversion to the mean, at $121.24. That was last tested during the week of Aug. 30, when the average was $113.48. This average also lines up with its quarterly value level at $121.54 as the buy level.

The 12x3x3 weekly slow stochastic reading this week is projected to slip to 63.67 from 78.23 on Jan. 24. At the Jan. 2 high this reading was 92.11, above the 90 threshold putting the stock in an inflating parabolic bubble formation. That was followed by the 13% decline from the high.

Trading Strategy: Buy on weakness to its quarterly value level at $121.54 and to the reversion to the mean at $121.24. Reduce holdings on strength to next week’s risky level projected to be $138.90. Its annual pivot at $134.44 should remain a magnet.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the past nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

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.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.