Caterpillar Leads The Dow

01/11/06 08:25:16 AM

by Arthur Hill

Caterpillar led the Dow industrials higher in November and continues to show leadership with a breakout to new highs.

Security: CAT
Position: Accumulate

Not all Dow stocks are happy about the 11,000 mark; Wal-Mart, Disney, General Motors, and Microsoft are just a few of the Dow 30 that have yet to break their December highs and continue to lag. In contrast, Caterpillar (CAT) broke above its December 2005 high with a strong move in early January 2006, and this solidifies the current uptrend. Moreover, two bullish patterns have been confirmed, and these point to higher prices and continued upside leadership.

The first pattern is an inverse head & shoulders pattern (Figure 1). The stock was challenging resistance in September, but fell apart in October and gapped below 50. Even though this gap certainly looked bearish, it did not frighten traders and the stock closed the gap in early November. The gap was bearish when it occurred. However, the ability to immediately firm and fill the gap canceled out this negative development. The recovery extended back to resistance and the stock consolidated in December (magenta oval). Together, the September consolidation, October low, and December consolidation formed an inverse head & shoulders and the neckline breakout at 60 signaled a continuation of the April-September advance.

The second bullish pattern is a strong advance and flat flag. This essentially forms the right half of the head & shoulders pattern. Again, the breakout at 60 signals a continuation higher and projects higher prices over the next few weeks. The breakout at 60 also turns into support, and this is the first level to watch for signs of weakness. Even though a move back below 60 would challenge the breakout, I would not turn bearish just yet. The December consolidation (flat flag or right shoulder) established support just above 56 in December. A failure to hold the breakout at 60 and a move below 56 would negate the whole setup and be bearish.

FIGURE 1: CATERPILLAR BREAKOUT. CAT broke above its December high with a strong move up in early January 2006.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Caterpillar Leads The Dow

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