CATERPILLAR POSTS HUGE GAINS THURSDAY – BUT FAILS TO CONQUER KEY RESISTANCE

Caterpillar, Inc.

shares saw a huge gap up yesterday following the company's upside surprise and bullish language in their earnings report and outlook – that's the good news for the bulls. However, the stock failed to close above key “correction resistance” at $99.58 – generated by the 100% Fibonacci price projection for what the bears claim is an “abc” upside correction. So, who is right? The bulls that opened the stock higher and pushed it even higher throughout the session yesterday? Or, the bears who didn't allow the stock to close above the key resistance level? Let's take a look at the bulls' and the bears' arguments… What the bulls see in Caterpillar… • A Treasury-beating 2.9% annual dividend yield • Attractive valuation metrics: o An enterprise value of $95.96 billion that trumps the market capitalization of $62.21 billion o A price-to-book ratio of 2.99 – just below the “fair value” threshold of 3 o A price-to-sales ratio of 1.13 • Net profits of 7% that spin off over $6 billion in annual levered free cash flow What the bears see in Caterpillar… • A PE ratio of 14 that seemingly is not justified by the estimated revenue growth of 3% or the estimated EPS growth of 11.9% for 2015 • A heavy debt load as evidenced by the 192% debt-to-equity ratio and $40 billion in total debt versus only $6.6 billion in cash The technical outlook for CAT… Technicians note that CAT shares are overbought (based on the %R indicator) and trading just below key “correction resistance” at $99.58. That is not a great combination for prospective bulls typically. Short-sellers are likely taking their shots at entering the CAT trade at or near the $99.58 level and will look to bound the stock back down to the recent lows near $90. Aspiring bulls will be looking to buy the stock on a dip in price – especially given the lack of fundamental catalysts for the stock after yesterday's earnings report was released. The nearest possible support levels for those bulls come in at the edges of yesterday's upside gap at $97.60 and $94.57. If the stock can manage a close above $99.58, the next upside targets for CAT will come in at the Fibonacci-generated $101.70 and $103.01 levels. Overall… With tepid growth estimates for 2015, the run up from the recent lows to $99.58 may be an opportunity for sales to be made at a favorable time. Perhaps a move down to $90 once again will be a better entry point for aspiring bulls – at least from a reward to risk perspective.