Last October, the Dow Jones Index captured headlines…

Its huge 14% rally was the Dow’s best monthly performance in 46 years. But this rally was not even half of the bullish move we saw in one of its constituent stocks…

Over the same month, Caterpillar (CAT) rallied a whopping 32%… and then continued rising higher.

By November 29 (red arrow on the chart below), CAT had rocketed 50% off its late September low.

But the strength of CAT’s rally put it into overbought territory… and in danger of a reversal.

However, after drifting slightly lower, CAT broke higher again. By the time it topped out in late January to its all-time high ($266.04), it had rallied an incredible 66%.

Recently, CAT has drifted lower again. So today, we’ll see what’s coming next…

A Fresh Break Higher

Prior to October, CAT was in a downtrend…

The 50-day moving average (MA – blue line) was trending down, with CAT making a series of lower highs in April, June, and August.

However, that all changed in October…

Caterpillar (CAT)

Source: eSignal

After the Relative Strength Index (RSI) formed a ‘V’ out of oversold territory (lower grey dashed line), CAT’s downtrend bottomed out in September.

Then, CAT began to rally as the RSI tracked back up toward resistance (green line).

Once the RSI finally got traction in the upper half of its band, CAT’s rally really started to gain momentum.

The angle of our two MAs shows the steepness of CAT’s rally… The 10-day MA broke up through the 50-day MA and accelerated at almost a right angle.

However, by November, this strong rally put the RSI’s peak in overbought territory. The RSI then made a series of lower highs (red line).

Soon after, CAT drifted lower – but it didn’t reverse sharply.

Instead, the RSI bounced off support. And CAT made a fresh break higher, hitting its all-time high in late January.

But this time, another RSI pattern saw CAT top out and reverse. Take another look at the chart…

Caterpillar (CAT)

Source: eSignal

Although CAT was making higher highs (upper orange line), the RSI was showing us momentum had peaked and was heading lower (lower orange line).

When we see divergence like this, we can expect a reversal…

And that’s exactly what happened.

Now, the RSI is stuck back around support (red circle). So, what can we expect from here?

Emerging Down Leg

For CAT’s October rally to resume, we’ll need to see the RSI hold support and stabilize in the upper half of its range.

The longer it can stay in its upper band, then the stronger that rally could be. CAT’s next test would then be to take out its January high.

However, right now that all depends on the RSI…

If the RSI breaks below support and starts tracking in its lower band, then CAT’s pullback will still have further to go.

I’m also watching our two MAs…

In February, the 10-day MA broke below the 50-day MA.

If the 10-day MA accelerates below the 50-day MA, while the RSI stays in its lower range, then this emerging down leg could transition into a bigger move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. I hope everyone learned something at my Shockwave Summit last night. There, I shared the ticker we’ll use to profit during the coming wave of volatility that’s about to strike the market next week.

In similar situations in the past, we’ve doubled our money – or more – using one specific strategy. And I believe we’re about to do it again…

The most important thing, though, is being prepared ahead of time. So if you weren’t able to attend last night, please take some time to catch the replay. You can watch by going right here.

Reader Mailbag

In today’s mailbag, a member of The S&P Trader thanks Larry for his SPX trade recommendations…

Hi there, I just wanted to send a short note to thank you. In the first three days, I’ve already made back the money I invested in your program by trading the SPX trades you’ve recommended.

I’m very grateful for what you do, and I’m excited about what this means for my financial future. Thank you.

– Lillian

Thank you for your thoughtful comments. We look forward to reading them every day at feedback@opportunistictrader.com.