Technical Outlook: Best Buy, Caterpillar - TheStreet

Technical Outlook: Best Buy, Caterpillar

Investors can use charts of certain companies to help project the state of the economy and global growth.
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The market continued its volatile behavior Friday as it appeared Republicans and Democrats were deadlocked on the proposed $700 billion

bailout

plan for the financial sector.

I do expect to see some type of decision in the next couple of days, but I don't think the volatility is going to subside in the near future.

The one positive in the short term is the very high level of cash sitting on the sidelines, according to Rydex Mutual Funds Money Market Index, and any approval of the rescue plan will likely be followed by institutional investors moving the market higher to draw that cash into the market.

In my column on

RealMoney

today, I pointed out that the intermediate- and long-term indicators in chart patterns of the

S&P 500

and banking sector are still pointing to more downside ahead.

Major problems remain -- the credit crunch, rising unemployment and slowing worldwide growth. Furthermore, I doubt that the bailout plan is anything but a drop in the bucket to cover the unknown derivatives that could still blow up in the credit markets.

That said, today I want to explain how investors can use charts of certain companies to help project the state of the economy and global growth. These stocks are often leading indicators of what is to come in the general market, so it's important to pay close attention to the price action.

The first one I watch carefully is

Cummins

(CMI) - Get Report

, a company specializing in manufacturing, designing and selling diesel, natural-gas engines, electric-power generation systems and other engine-related products. This company markets its products worldwide, and it has been a very good indicator of growth rates.

The chart shows that the weakness began back in October, and then after trending sideways for several months, the stock made a run at new highs during the first part of this year. Cummins held that level for a few months and is now in a sharp intermediate-term trend down.

The key will be whether it holds the $45 support level and turns back up or quickly slices down through it. If we do see a break, it will likely be a strong signal that worldwide growth is slowing faster than expected.

On the consumer side, I often keep an eye on

Best Buy

(BBY) - Get Report

, which sells consumer electronics, home-office products and entertainment software. Watching the action of this stock is often a good tell on the health of the consumer, and there certainly isn't any overwhelming strength in this area. The key now will be for the stock to hold above the $38 level.

Another great indicator of worldwide growth is

Caterpillar

(CAT) - Get Report

. When economies are sound, this stock will usually trend strongly higher.

Now, the chart reveals that the prices are in a primary downtrend and close to testing the 2007 low. It will be important for the price to hold above these levels to signal that the current worldwide weakness is stabilizing.

Finally, I monitor the leadership of stocks in the market to gauge the health of the economy. The chart below indicates that the number of leadership stocks has been dropping, and earlier this week the lead/lag ratio hit a level of negative -2607. While the trend is negative and descending, it's roughly at a 50% retracement from the previous high and low. That makes the current level open to being a pivot point based on the results of the bailout package and the market's reaction.

Market leadership is one of the key ingredients that I need to see before I'm going to believe we are in any bottoming process. This chart clearly shows that scenario hasn't yet happened. This ratio needs to move into positive territory in order to signal the possibility of an upside reversal in the market.

Click here for larger image.

Source: StockTiming.com

At time of publication, Manning had no positions in stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback;

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to send him an email.