CAT's Strong Growth Points to EMIF

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau

NEW YORK ( ETF Digest) -- Caterpillar ( CAT) posted third-quarter record sales and revenue for the company Monday. In their news release I read that they have added more than 30,000 jobs to their global workforce since the beginning of 2010 and the stock lifted over 5% today. Caterpillar is the world's leading manufacturer of construction and mining equipment and has seen strong growth in the developing world as well, so I decided to take a look at the daily chart of the iShares Emerging Markets Infrastructure Exchange Traded Fund ( EMIF).

This commentary is touching on some prior chart signals, and what I believe were favorable trade locations to be remembered. Back in early October this year EMIF gapped down at the open, and made a new 52-week low, but this turned out to be an "unfair low."

What is an unfair low? An unfair low in an auction is when those who own are not going to sell at lower prices. The juice has been squeezed out of the lemon so to speak. This would be near impossible to be predicted beforehand. The graveyard is littered with traders who bought solely because price was making new lows and looked cheap. I believe timing the top or the bottom is a deadly ego game.

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With that being said, that day the demand was quite fierce as price rallied into the close on above average volume and closed more than half way into the prior day's opening and closing range. This is known in terms of Japanese Candlestick Analysis as a "Bullish Piercing Line" pattern.

There was an opportunity the next day to buy as EMIF opened near the prior day's close and never looked back, closing at the high of the day and above the prior two days' high, confirming the Japanese Candlestick reversal pattern. Poor position sizing or tight stop placements can get you in trouble trading off of every potential candlestick reversal pattern alone. I have not found them to be reliable enough to get aggressive. Looking back, playing "Monday Morning Quarterback," this is where it made sense to have only "dipped the toe" with an initial position.

About a week later a "double bottom" pricing pattern then formed when EMIF broke above the high point in the middle of the letter W on the chart, and that would have been the next logical entry point in my opinion to add to the trade. A double bottom is a classic technical analysis reversal pattern.

Shortly thereafter a rectangle consolidation range formed and today we had a breakout. The breakout offered another opportunity to add for a third time. The profit-taking target of the double bottom (top of the middle peak of the W to the low of the W) has now been reached and so has the target of the rectangle (width from the top to the bottom of the rectangle) as well.

This breakout has also offered the ability to trail a stop loss on the original position to beneath this consolidation range, locking in some further gains, and also letting some of the position ride until a new sell signal presents itself. Should EMIF get above $31 per share, the path of least resistance is upward.

I know this is all easy "after the fact", but I wanted to point out some of these trade setups because I believe each one is likely to present themselves again in another market in the future. The more we keep studying the patterns of supply and demand in past charts, the quicker our eye will become in real time.

Dave Fry has a great article on the Top Ten Global Building Infrastructure ETFs.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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