Caterpillar (CAT) has had a massive 12 months.
The mining and construction equipment giant rallied 83% from September of last year to its recent highs.
Just over 40% of that rally came in a two-month burst. That included CAT’s gap higher after its Q2 earnings beat.
Yet when we last checked in on CAT in mid-August (red arrow on the chart below), it was struggling to maintain momentum.
And as the chart shows, CAT has failed to break higher since.
With momentum continuing to wane, today I want to see what’s coming next…
Three Distinct Phases
The chart of CAT below shows three clear phases over the past 12 months.
CAT rallied up until January of this year, followed by a pullback through to late May. It then rallied onward from June.
These moves are reflected in the 50-day moving average (MA, blue line) below…
Caterpillar (CAT)
Source: e-Signal
And be sure to notice the role momentum played in each of these moves.
When CAT was rallying in the first and third phases, the Relative Strength Index (RSI) tracked in the upper half of its band.
But when CAT retraced in that middle phase, it coincided with the RSI breaking through support (green line) and bearishly trading in its lower band.
The action of the 10-day MA (red line) against the longer-term 50-day MA confirmed all three moves.
In those rally phases, the 10-day MA crossed above the 50-day MA and accelerated higher. When CAT retraced, the 10-day MA crossed below the 50-day MA.
Since CAT peaked in early August, these indicators’ actions have caught my eye…
After hitting that peak at “A,” the RSI steadily fell, making a series of lower highs (lower orange line).
Take another look:
Caterpillar (CAT)
Source: e-Signal
This waning momentum prevented CAT from breaking up through resistance (upper orange line) despite testing it multiple times.
Having tested support in August and held, the RSI has since continued to drift lower… and recently broke into its lower range.
This action has pulled CAT lower.
Adding to the bearish sentiment, the 10-day MA has also recently crossed below the 50-day MA.
So what am I looking for here?
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Potential Fall
As the chart shows, when the RSI remained stuck in its lower band, CAT continued to slide. It only turned higher when the RSI broke through resistance (like it did in June).
And that’s what I’ll be watching from here…
The longer the RSI tracks in its lower half, the longer – and potentially steeper – CAT’s fall will be.
The other thing I’ll be keeping tabs on is our two MAs…
As I mentioned, the 10-day MA has recently crossed below the 50-day MA.
Although it’s still in the early days with this move, the 10-day accelerating further below the 50-day MA will add further confirmation of an emerging downtrend.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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