By Larry Benedict, editor, Trading With Larry Benedict
Mining and construction equipment giant Caterpillar (CAT) has enjoyed a massive boon these past few months.
From its short-term lows in October, CAT rallied strongly into the end of last year. Then after consolidating, it surged higher around the middle of last month.
CAT’s all-time high a week ago represented a massive 50% gain in just over three months.
But after hitting that peak on February 5, CAT has shown some short-term weakness and failed to make new highs.
Today, I want to check in on CAT’s chart and see where it could be heading next…
Building a Rally
On the left-hand side of the chart below, you can see CAT’s gradual retracement from its early 2023 high.
That down leg coincided with declining momentum. The Relative Strength Index (RSI) tracked in the lower half of its range (below the green line).
Caterpillar (CAT)
Source: eSignal
But with momentum rebuilding, CAT’s fall started to dwindle in late May…
CAT rallied in early June as the RSI bullishly broke up through resistance and gained traction in its upper band.
As the chart shows, that up move was further confirmed with the shorter-term 10-day Moving Average (MA, red line) crossing above the 50-day MA (blue line). And both MAs tracked higher.
But when we checked in on CAT back in October (red arrow), a number of technical signals indicated that it was vulnerable to a fall.
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The RSI and stock price were diverging (left orange lines). That pattern often precedes a reversal. And the RSI bearishly drifted into its lower band.
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The 10-day MA had broken below the 50-day MA.
And as the chart shows, that bearish sentiment is how things turned out…
Take another look:
Caterpillar (CAT)
Source: eSignal
CAT continued to drift until bottoming out on October 31.
Yet then we saw a repeat of June’s pattern. And CAT found a base and rallied again.
That move coincided with RSI lifting from oversold territory (lower grey dashed line). And the 10-day MA broke back above the 50-day MA, with both MAs rising.
The blue MACD line also broke above the orange Signal line with both tracking higher.
But it’s the recent price action that caught my eye…
As you can see, there is another diverging pattern growing between the RSI and CAT’s stock price (right orange lines). That’s warning of another potential reversal.
So what should we look for next?
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Emerging Down Move
The main thing I’m watching right now is momentum.
It’s still early days with the emerging down move. But if momentum keeps falling then that will continue to pull CAT lower.
The next test after that will be what happens around support.
As you can see, when the RSI bounced off support in the middle of last month, it rallied up to its all-time high.
If it falls through support instead, that will add further weight to any down move.
The other thing to keep a close watch on is the MACD…
The MACD crossing and tracking below the Signal line (with both tracking lower) will add further evidence of an emerging down move.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict