Caution: This Stock Looks Stretched

Shares of Caterpillar Inc. (NYSE:CAT) are higher by just about 22% for the year-to-date while the industrial stocks as a group are up about half of that.

While CAT stock remains in a strong 18-month up-trend, on both the multiyear and near-term charts it has arrived at critical points where caution may be warranted and trades are setting up.

Caterpillar reported its latest batch of earnings on July 25 before the start of trading for the day.

The company beat analyst expectations and, more importantly, raised its outlook, to which the stock reacted positively and gapped higher.

So you know, on my proprietary stock market sector scanner algorithm, the industrial stocks as represented by the The Industrial Select Sector SPDR Fund ETF (NYSEARCA:XLI) of which Caterpillar is a part, turned near-term bearish on July 27.

The sector does however remain both near and longer-term bullish.

CAT Stock Charts

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the multiyear chart, we see that CAT stock’s sharp 100% rally since the early 2016 lows has now brought it back up to its previous all-time highs from the years 2011 and 2012.

While ultimately the stock could throw itself to new highs, previous all-time highs usually take time to overcome on a sustainable basis. In other words, CAT stock’s 18-month rally looks stretched and in need of a pause.

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the intermediate-term chart, we see that the rally off the early 2016 lows for the most part has taken place within a well-defined up-trending channel, i.e. each time CAT stock reached the upper or lower end of the channel it began to mean-revert in the other direction.

Last week’s post-earnings up-gap has now pushed CAT stock right back up to the very upper end of this channel and thus to a spot where a mean-reversion move lower stands a good chance.

Lastly, on the close-up daily chart, we see last week’s post-earnings up-gap and that CAT stock has been in consolidation mode since. Traders could now look for one of two opportunities: A break and hold below $112 could lead to a “gap fill” toward $108 as a first downside target and possibly also set in motion a multiweek/multimonth mean-reversion lower.

Alternatively, should CAT have more life in it yet and push and hold above $115, then a quicker trade toward $118-$120 may be in the cards. It is important, however, to keep in mind where CAT stock currently trades on its multiyear and 18-month chart … i.e. overbought.

— Serge Berger

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Source: Investor Place