After a 66% Bounce, This “Old Economy” Stock Is Looking Vulnerable

After hitting its 2022 low in late September, Caterpillar (CAT) – an American construction equipment manufacturer – went on an absolute tear.

By the time it topped out in January, it had rallied 66%. That’s a huge move for an “old economy” stock in just four months.

However, that rally put CAT into overbought territory. It then rolled over and started to reverse.

After a brief counter-rally in February, CAT made another leg down. It then found short-term support in March.

Now, that level is about to be retested. So today we’ll see what’s coming next…

Building Short-Term Support

On the chart below, you can see CAT’S downtrend through October.

In a commonly bearish pattern, CAT made a series of lower highs throughout that down move. The 50-day Moving Average (MA, blue line) also dipped down…

Caterpillar (CAT)

Source: eSignal

However, the Relative Strength Index (RSI) made a ‘V’ from oversold territory (lower grey dashed line) and tracked higher. And that’s when CAT began to rally.

This rally coincided with two bullish technical signals…

1. After briefly testing resistance (green line), the RSI broke up into the upper half of its range.

2. The 10-day MA (red line) broke above the 50-day MA and accelerated higher. Both MAs tracked higher.

But then, that rally petered out and started moving sideways. The RSI peaked and dropped lower through November.

When we checked in on CAT on March 9 (red arrow), it had rallied again after that sideways move up to its all-time high of $266.04 in late January.

However, another RSI pattern led CAT to reverse…

The stock price and RSI began heading in different directions (diverging orange lines), and CAT drifted lower as buying momentum turned down.

Adding to the bearish sentiment, the 10-day MA crossed back below the 50-day MA.

Then, after a brief counter-rally in early March, CAT made a fresh leg down. The RSI also tracked deeper into its lower band.

Since then, CAT built short-term support (red line) as the RSI tracked higher from oversold territory.

Take another look at the chart…

Caterpillar (CAT)

Source: eSignal

However, the RSI was unable to break through resistance (green line) and recently turned down (red circle).

After initially showing signs of a rally, CAT is now testing its short-term support and looking increasingly vulnerable.

So, what can we expect from here?

Regaining Traction

The most immediate test for CAT now is what happens along support.

If the RSI can grind higher and regain traction in its upper band, then that’ll help CAT hold its short-term support level.

Any rally beyond that will need the RSI to keep moving higher into its upper band and stay there.

However, unless buying momentum returns, CAT will come under increasing pressure.

If the RSI drops lower and gets stuck in the lower half of its range, that’ll make it extremely difficult for CAT to hold support.

A break below that support level, along with declining momentum, would mark the start of another leg down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

What are your predictions for Caterpillar (CAT)?

Let us know your thoughts – and any questions you have – at [email protected].