Caterpillar Offering Decent Risk/Reward For Longs Here


Caterpillar Inc. (NYSE: CAT) famous for its yellow construction equipment announced second quarter earnings last week that led to a roughly 5% sell-off in the stock last Friday, July 21.  Equipment sales in Asia and Latin America were solid but higher input costs (steel and other raw materials) weighted on the bottom line.  And while the company’s earnings surged 44% on record sales its profit outlook left investors with something to be desired for.

The industrial stocks as a sector have flashed several longer-term warning signals as of late (divergence with the transports as well as bearish chart patterns) but Caterpillar Inc. (NYSE: CAT) still looks like an attractive setup here for those investors that don’t have to fall in love with a stock for multiple years. 

On the weekly chart looking back to 2009 we see a clear up-trend that is still very much in place.  The stock keeps retreating to this trend line for consolidation purposes, only to then work higher again.   


The daily chart looking back to January 2011 shows how well Caterpillar Inc. (NYSE: CAT) respects its 50 and 200 day simple moving average.  After holding as support until early May, the 50 day simple moving average (yellow line) then held as resistance until the end of June and now again has a good chance to hold as support.  The rising 200 day moving average (red line) also coincided with the longer-term up-trend (blue line) in mid June, acting as solid support. 


After the earnings announcement last week the stock dropped 5% and landed right on its 50 day simple moving average and the 50% Fibonacci retracement line of the move off the June lows to the highs in early July.  If the stock wants to move higher in the near term it should hold here and bounce. 

The trade I see setting up is to go long near yesterday’s close of $105.65 with a stop near the 200 day simple moving average and a profit target at $117. 

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