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DOUBLE BOTTOMS


CAT Leaps Higher

02/15/07 02:49:34 PM
by Gary Grosschadl

Caterpillar, Inc., is in the midst of a classic bottom pattern and is pushing higher.

Security:   CAT
Position:   Hold

This six months' daily chart (Figure 1) shows a double-bottom formation that was confirmed when the stock first closed above the troughline in late January. Note how this coincided with a break above the ever-important 200-day exponential moving average (EMA). A brief consolidation period followed, and now the stock is breaking higher.

With a double-bottom pattern, the completion target is a move above the trendline equal to the distance from the double bottom to this same trendline. This translates to a target near $69. Since it previously peaked just above $70, the target range is $69–$70. This does not mean it can't go higher, but this represents a trading target with likely profit-taking pressure.

FIGURE 1: CATERPILLAR, INC., DAILY. Caterpillar Inc. approaches its completion target.
Graphic provided by: StockCharts.com.
 
Several indicators are examined. At the top of the chart, the components of the directional movement indicator (DMI) show a strong trend in place. The average directional movement index (ADX) is upsloping at 31.70. Above 20–25 is considered a strong trend by most traders. The moving average convergence/divergence (MACD) remains strong above the zero-line, even with the slope changing. Note the great positive divergence signal when the stock made its double bottom at $58. This served an excellent early buy signal for the intrepid bottom-pickers. Meanwhile, the relative strength index (RSI) and the stochastic oscillator are in overbought territory, but both indicators can stick high for an extended period when a strong trend is in place.


In summary, the stock is nearing the pattern completion target. Should a surprise reversal occur, the 200-day EMA would have to hold support for any hope of another upleg being launched from reasonable levels. Future 200-day EMA support could be another opportunity for new bulls to enter the market.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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Date: 02/15/07Rank: 5Comment: 
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