JC Parets’ Eagle Bay Capital delves into the technicals for all 30 Dow companies. Looking at Caterpillar Inc. CAT, specifically, the firm noted a few key points.
Structurally, Eagle Bay wanted to avoid Caterpillar since it broke the uptrend line from late 2013 (dashed line). According to the report, they wanted to be buying down under $80, following an acute selloff.
“This area has served as support since 2012 and also represents the 38.2% Fibonacci retracement of the 2008-2011 rally,” they explain.
“We said that momentum staying out of oversold conditions on this correction would be a positive and so far we are getting that (although barely),” the report adds. “Relative strength is still a disaster rolling over last summer at former support. But this still looks an area we want to be accumulated shares structurally.”
They conclude that there is no reason to be long if shares are below the 2012 lows, and suggest looking tactically at the daily chart for short-term perspective.
The above chart shows a failed breakout in July 2014, and a successful retest in early September.
These were the catalysts “to really break this down,” short-term; the sell-offs “were able to get momentum in a bearish range.”
Moreover, with the “bullish momentum divergence failing in December,” the analysts have wanted to “look for short opportunities with a downside target of 79.50 based on the 161.8% Fibonacci extension from the Fall rally.”
The stock hit this target in late-January, which the firm said is where it wanted to be covering shorts.
Parets provides a recommendation: “At this point, based on the more bullish structural picture, momentum diverging positively again, and downside objective reached, we can still stay long only above the January lows. I would be taking profits near 90 which was formerly support and now represents the 38.2% Fibonacci retracement of the November-January decline. We suggested adding to longs if we got above 82 and did that nicely this week.”
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