NEW YORK (RealMoney) -- Earth-moving giant Caterpillar (CAT) - Get Report manufactures its construction and agricultural equipment products in 23 countries for distribution in over 200 countries. Its rapidly growing China business is particularly noteworthy, since that part of the planet is building infrastructure at a phenomenal rate. Given this broad reach, the whole world will be watching when the company reports second-quarter earnings on Friday morning.
component has been a market leader since 2009, rising fourfold and breaking out to an all-time high in December of last year. This outstanding performance gives it a top ranking within the venerable index, placing third in five-year price appreciation, just behind
International Business Machines
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Despite its worldwide footprint, the stock remains an early cyclical play, vulnerable to the vagaries of economic growth and contraction. Not surprisingly, its steady uptrend has faltered in recent months, as China has slammed the brakes on its torrid growth by hiking interest rates while the U.S. and Europe struggle with debt overhang that threatens their anemic recoveries.
This exposure cuts both ways, because observant market players should get an opportunity to own the stock at an excellent price as soon as China ends its rate hikes and the western world takes a dip in the austerity pool and gets its spending under control. Both of those events could occur later this year, signaling an all-clear signal for the industrial juggernaut to take off and head toward $150.
Let's examine the long-term and short-term price history of this iconic company and then zoom in, identifying key price levels that might come into play after Friday's confessional.
Caterpillar was a steady performer through most of the 1990s, rising from a 1991 low at $4.70 (post-spilt) to a 1997 high in the low $30s (green line). It then entered a broad sideways pattern that lasted over five years, with the stock finally breaking out in July 2003 and heading into a steady uptrend that topped out at $82 in May 2006 (upper red line).
It spent the next two years grinding through a massive triple-top pattern that finally broke to the downside in September 2008, dropping price vertically for the next five months before bottoming out at a five-year low near $20. The stock then stair-stepped higher in a steady recovery, returning to resistance from the breakdown (lower red line) about six months later
The uptrend made little progress for nearly one year while price fought its way back into the pre-crash trading range and then established new support in the low $60s. This chore was finally completed in September 2010, giving way to a powerful advance into 2006 resistance, followed by a December breakout to an all-time high and a steady uptick into the current peak at $116.55.
Zooming into the weekly view, notice how the uptrend from 2009 into 2011 topped out 50% above the 2007 high. This Fibonacci extension marks a healthy breakout that's in need of a rest and consolidation phase. It looks like that sideways pattern is now setting into place, carving out a trading range between support in the mid-$90s and the rally high posted in May.
Realistically, the stock has made little progress since it pushed into triple digits back in February (green line); this tells us that range-bound action has controlled this issue for over five months now. The sideways pattern looks incomplete, with a single pullback and a bounce that's trying to establish support in the upper half of the range.
A lot could happen here, including a double top, lower high and selloff, or a contracting range that establishes a broad triangular pattern. Longer-term relative strength cycles indicate that it's too early for the stock to just push higher, break out and enter a new uptrend. As a result, investors should curb their enthusiasm if the company posts positive results on Friday morning.
The daily pattern looks toppy by almost any technical standard, with the deep selloff between early May and mid-June the most prominent feature since the start of 2011. In addition, the decline broke the string of higher highs and higher lows in place since February 2010. The stock now needs to re-establish that bullish sequence by successfully testing the June low near $95.
I'd rather see a selloff after earnings, because lower prices would bring the stock one step closer to finishing the sideways pattern and getting it positioned for a breakout and rally to $150. That observation is counterintuitive but logical, because aggressive sellers will be lying in wait near the May high, and a major reversal at that level is practically guaranteed.
Watch support between $95 and $100 if I get my wish and the stock takes a header into the end of July. A basing pattern within that zone would build strong support and increase the odds that a subsequent advance has the power to take out selling pressure above $115. Alternatively, if support breaks, the decline is likely to gather momentum and spiral into the mid-$80s.
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
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