NEW YORK (TheStreet) -- Caterpillar (CAT) - Get Report has given back the bulk of its rebound off the August lows. The stock managed a slight bounce off the spike low on Aug. 24 but was unable to move past heavy resistance near $76. This month, Caterpillar has drifted lower but appears to be developing a significant base. For patient investors, the stock is setting up as a low-risk buy near current levels.
Caterpillar's breakdown from Aug. 20 to Aug. 24 pushed shares to new lows for the year. Despite the move to new lows, Caterpillar's downside volume was well contained by comparison. The stock, unlike the bulk of the Dow members, has been in a steep downtrend since late May. The action during the August selloff appears to be an exhaustion move and may be signaling that the downturn since the May peak is beginning to run out of steam.
Caterpillar is working in its fourth straight lower monthly high and at last month's low was over 24% below its 2015 peak. The most recent leg of this decline has put in place a divergent bottom in the moving average convergence/divergence indicator. This adds significant bullish potential to the developing basing pattern.
With this in mind, investors should consider the $72-to-$70 area as an important entry zone. If Caterpillar can build a base here followed by a close above the July low near $74.80, a healthy rally may be on the way. The July low marks a break through the upper band of a bearish channel that has been in place since May. This key trend line connects the stock's June, August and September highs.
On the downside, a close back below $69 would indicate a more prolonged base will be needed before Caterpillar can mount a new bull leg.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.