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A Bearish Triangle For CAT

08/26/08 09:12:02 AM
by Arthur Hill

Caterpillar formed a triangle consolidation after a sharp decline. This pattern looks like it could be a rest before a continuation lower.

Security:   CAT
Position:   Sell

Figure 1 focuses on the triangle and resistance. Caterpillar (CAT) declined sharply from late May to mid-July and broke both the 50-day and 200-day moving averages in the process. These moving averages converged to mark resistance for the July bounce (red arrow). Both moving averages are now moving lower and CAT is trading below both for a clear downtrend.

FIGURE 1: CAT, DAILY. This stock declined sharply from late May to mid-July and broke both the 50-day and 200-day moving averages in the process.
Graphic provided by: TeleChart2007.
 
After the sharp decline, CAT consolidated from mid-July to late August and formed a triangle. Even though the triangle shows support from the July–August lows, the stock has not been above to bounce and remains in a clear downtrend. This downtrend favors a bearish resolution to the triangle. A break below triangle support (August lows) would signal a continuation of the prior decline and project a move to new lows.

The long-term perspective of the weekly chart allows for some downside target projections (Figure 2). First, the weekly chart shows a support zone around 57–59. This zone stems from the 2006 and 2007 lows. Can CAT make it to support for a third year running? A triangle break would target a move to this zone.

FIGURE 2: CAT, WEEKLY. Can CAT make it to support for the third year running?
Graphic provided by: TeleChart2007.
 
For the second target, I am going to treat the triangle on the daily chart like a pennant or flag on the weekly chart. The first decline was 17 points (84 to 67). A similar move from the triangle high would project a decline to around 58 (75 - 17 = 58). This target jibes with the support zone target and further reinforces its validity.



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.

Title: Editor
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Date: 08/27/08Rank: 5Comment: 
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