Caterpillar

A similar setup is shaping up in Caterpillar ( CAT), even if it's not as textbook right now. While ascending triangles are typically continuation setups that come into play during an uptrend (as with MNR), Caterpillar is forming an ascending triangle bottom, a triangle pattern that's forming at the bottom of a downtrend. It's a perfect example of the idea that the pattern itself isn't as important as what's actually causing it.

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In real terms, it's helpful to think about an ascending triangle pattern in terms of buyers and sellers. That $92.50 resistance level in CAT is a price above which there's a glut of sellers -- they've absorbed any buying pressure at that price the past few times CAT has tried to move higher.

At the same time, the higher lows in the stock indicate that there is increasing buying pressure at lower levels. For that reason, it's best to be a buyer when the stock moves above $92.50 -- that's an indication that buyers are now more eager to buy CAT at a higher price than sellers are to sell. With selling pressure absorbed, the stock will have increased room to run.

Momentum has been in an uptrend for CAT since before the stock bottomed back in July. That adds some extra confidence over this setup since momentum is a leading indicator of price. As with MNR, it's critical to wait for the breakout to happen in CAT before buying. That's when it becomes a high-probability trade.

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