Bullish on CAT Despite Current Correction

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About 11 months ago,I told our members to watch for a continued rally in Caterpillar Inc. (CAT).  The stock had exploded to the upside after breaking above 6-7 year resistance at 112-117.

As it resided at just above 136, I wrote:  “CAT still looks like it has unfinished biz on the upside into the 145-146 area next.”

I noted that while CAT certainly was overbought, “my work considers momentum to be in a ‘healthy overbought’ condition, rather than a divergent overbought condition. Usually a healthy overbought condition suggests that higher-highs will be forthcoming prior to the onset of a significant correction.”
CAT certainly complied with our analysis and then some, accelerating through our 145-146 target zone to a January 2018 high at 173.25.

Since that high, however, CAT has naturally pivoted to the downside into a correction that has pressed to a low so far at 129.43, or 25% beneath the January high. The weakness coincides with current realities and ongoing uncertainties about trade with China. 

My pattern work argues that CAT remains in the grasp of a major correction of its prior up-leg from the January 2016 low at 56.36 to the January 2018 high at 173.25, and based on that larger, multi-year pattern formation, the price structure should press into the area of its 2017 upside breakout plateau in the vicinity of 110 to 115.

Just for eco-political context (and for fun), I have overlaid “suggestive descriptive labels” of the various price moves (phases) since Trump’s election, which represented a potential resurgence of mining and manufacturing industries, tax benefits, and fewer industry regulations (Phases 1 and 2). CAT currently is in Phase 3, which reflects the uncertainties of tariffs and perhaps the outcome of the mid-term elections on its business.

If CAT, which is currently at around 132, presses to, holds, and U-turns off the 110-115 support zone, then based on my BIG picture pattern analysis, the price structure will enter Phase 4, anticipation of, and reaction to, the “tariff-resolution dividend period,” which will propel CAT sharply higher towards a 210 to 230 eventual target zone.

A sustained weekly break below 110 will reduce confidence in my current outlook.

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