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Caterpillar Is Stretched

I remain bullish on the stock but believe its near-term momentum has run its course.
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Shares of Caterpillar (CAT) have traced out an impressive rebound this month. The stock dipped slightly below the $100.00 area following a three day flush in late July before mounting this strong comeback. The stock reached the top band of a major support zone as the century level was pierced. This area included the 2013 high of $99.70 as well as the February peak of $98.25.

When CAT was pushing deeply into this short-term oversold reading, a low-risk entry opportunity developed. Following its 9% rally off the Aug. 1 spike low, I am going to sell half of my CAT position as the stock nears $108.00. I regard this area as a very heavy resistance zone and expect a bit of backing-and-filling action in the near term before the August rally continues.

Caterpillar (CAT)

Source: FreeStockCharts.com

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The $108.00 area marks the stock's ugly breakdown gap left behind back on July 24. CAT fell more than 3% that day on very heavy trading after the company posted its second-quarter earnings report. The flush sparked a steep selloff that quickly retraced CAT's 16-week uptrend. Two weeks later, the stock had dropped more than 10% from its July peak.

After seven straight higher lows on steadily contracting volume, I expect the earnings gap to cap the current rebound, at least temporarily. I am looking for a healthy pullback in the near term to work off some of the overextended rally. A fade back down to the $103.50 area will fill the powerful August 11 upside gap and provided a re-entry opportunity.

I remain bullish on CAT and expect the stock to challenge the multi week July peak of $111.50, but believe the near-term momentum has run its course. A fresh base near the $104.00 to $014.00 area will refresh the bulls.

At the time of publication, Morrow was long CAT.