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SUPPORT & RESISTANCE


Caterpillar, Inc. Hits Strong Support

04/13/15 05:23:11 PM
by Chaitali Mohile

A short-term bearish rally of Caterpillar, Inc. has reached the previous low. Will the rally rest or plunge further?

Security:   CAT
Position:   Buy

Forming an ascending triangle at the bottom of the bearish rally is a robust reversal signal for any stock or index. Caterpillar, Inc. (CAT) is one such stock. The stock bottomed in 2013 with the support of the 200-day moving average (MA), forming an ascending triangle as you can see on the weekly chart in Figure 1. The triangular formation geared up buyers that were waiting for a huge bullish opportunity. Eventually, CAT broke upward in late December 2013. The stock enjoyed the bullish run for almost six months in 2014, marking a top near $110. Traders made a big profit of nearly $20 with low risk.

Since the stock rallied continuously for six months, it gradually lost the strength to run further. The indicators turned overbought, suggesting a trend reversal possibility. The full stochastic (14,3,3) reached 90 levels, the moving average convergence/divergence (MACD)(12,26,9) surged to highly positive levels and the average directional index (ADX)(14) slipped to overheated levels above 40. As a result, the bullish rally and the indicators of CAT in Figure 1 changed their direction downward. The price rally and the stochastic oscillator formed lower highs and lower lows, highlighting the rising bearish momentum. The MACD underwent a bearish crossover in Figure 1. Gradually, CAT slipped below the two moving average supports, retracing toward the previous low formed by the ascending triangle.

Figure 1. Weekly Chart Of Caterpillar, Inc. (CAT). The stock price has slipped below the two moving average support levels. and is on its way to the previous low formed by the ascending triangle.
Graphic provided by: StockCharts.com.
 
In the last few weeks, CAT has been resting at this strong support level. The stochastic is oversold for almost a month and the negative MACD is ready to undergo a bullish crossover. The well developed downtrend is heading toward an overheated level (above 40). This shows that the stock is likely to sustain at this robust technical support in Figure 1.

Figure 2. Monthly Chart Of CAT. You can see the formation of a long-term ascending triangle with resistance at $110. This suggests that CAT could continue moving within a wide range.
Graphic provided by: StockCharts.com.
 
CAT has formed a long-term ascending triangle as seen at the top of the monthly chart in Figure 2. The chart shows strong resistance at the $110 level and equally strong support at the $80 level. Earlier, the stock had reversed thrice from this level and established support at $80. The marginal higher lows near the support line (see the red and green line) in Figure 2 shows an ascending triangle formation. These higher lows were formed due to minor trading hiccups. This triangular pattern breaks in an upward direction. However, the robust resistance at $110 forced the stock to break downward and hit its previous support. This signifies that CAT could continue moving within the wide range.

Currently, the full stochastic is showing readiness to climb to higher levels in the oversold region but the other two indicators are not reflecting any bullish reversal signs. In such a scenario, CAT is likely to consolidate at support before initiating a fresh upward rally. CAT is one of the stocks that offers equal trading opportunities to buyers and sellers.

To conclude, the stock would surge toward resistance with the strong support of the previous low pivot.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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