Caterpillar Is Digging Itself Out of a Hole

The last time the technical indicators on the Caterpillar  (CAT) chart were similarly aligned, the stock saw a 10% move higher. A recent pattern breakout suggests another strong move is underway.

A cup and handle pattern began forming on the daily chart last month after the stock retested the 50% Fibonacci level of its 2009 low and 2014 high. Rim line resistance is positioned in the $71 area. Price action over the last week has been outside an intermediate-term downtrend line and above the declining 50-day moving average. A breakout from this pattern projects a target price back up to the 200-day moving average, and the potential move is being reinforced by a repeat of a bullish set of technical indications.

In April this year, the stock was trading under a small horizontal resistance level and its 50-day moving average but was making a series of higher lows. The relative strength indicator was above its 21-period signal average and tracking higher, and daily moving average convergence/divergence, overlaid on a weekly histogram of the indicator, saw centerline crossovers on both timeframes. These are positive price momentum indications.

The Aroon indicator, which focuses on time relative to price to measure momentum, was making a bullish crossover suggesting a change in trend, while accumulation/distribution was moving higher and above its 21-period signal average, and Chaikin money flow, a 21-period average of the A/D line, was in positive territory.

Those same indications are in place again, as the stock is breaking above pattern resistance. This should be viewed as a short-term opportunity because of the overall weakness in the sector, but this breakout from a well-defined pattern based off the 50% retracement level may have some longer-term significance.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stock mentioned.

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