Dow component Caterpillar Inc. (CAT) has rallied to an all-time high after lifting above 2011 resistance at $117. The breakout unfolded quietly, with price drifting higher on average volume within a shallow rising channel that has now reached above $120. While the uptick is generating decent buying powers, technical deficiencies warn that it is likely to fail in coming weeks, trapping breakout buyers in a prolonged correction.

The stock has printed three unfilled gaps down to $85 since November 2016 while holding steadfast to support at the 50-day exponential moving average (EMA). Historically speaking, it tends to grind out more volatile two-sided action over time, cutting through logically placed stop-losses. It also has not touched or tested the 200-day EMA since July 2016, with the moving average now situated more than 16 points under this week's trading levels. (See also: Caterpillar Legal Woes Could Hurt Outlook.)

A confluence of benign factors has underpinned Caterpillar's rally in recent months. The Trump administration's commitment to infrastructure rebuilding should generate healthy sales of heavy equipment, but no one knows when that stimulus will pass Congress given their perennial dysfunction. Stronger-than-expected 2017 Chinese growth has also bolstered the stock's upside, with that nation's industrial spending adding billions to Caterpillar's bottom line.

CAT Long-Term Chart (1990 – 2017)

The stock broke out above the 1987 high at a split-adjusted $9.34 in 1993 and entered a strong uptrend that continued into the 1997 high at $30.82. It then dropped into a multi-year inverse head and shoulders pattern with resistance at that level, finally breaking out in July 2003. The subsequent uptick added points at a rapid pace into the 2006 high at $82.03, giving way to a triple top pattern that broke to the downside during the 2008 economic collapse. (For more, see: Do Fundamentals Support Caterpillar's Big Gains?)

Selling pressure ended at a five-year low in the low $20s in March 2009, while the subsequent recovery wave unfolded at the same trajectory as the prior decline, completing a round trip into the 2008 high in the fourth quarter of 2010. It broke out immediately, surging higher in a strong uptrend that fizzled out at $114 in May 2011 at the same time that commodities were topping out worldwide due to a contraction in the Asian growth rate.

In 2012 and 2014, tests at range resistance failed to generate a breakout, yielding a steep decline that cut the stock's price in half into the January 2016 five-year low at $21.27. The subsequent recovery completed a bullish V-shaped pattern in July 2017, ahead of an August breakout that has now lifted just three points above new support. The lack of a momentum thrust toward $130 following the breakout raises the odds that sellers will eventually take control and generate a major failure swing. (See also: Caterpillar: 6 Things You May Not Know.)

CAT Short-Term Chart (2011 – 2017)

A Fibonacci grid stretched over the 2016 into 2017 uptrend places the November gap right at the 50% retracement level. That will mark a continuation gap if the rally ends right here, so it is just speculative at this time. However, that price action also carved the first of three rally gaps that remain unfilled, which is highly unusual, given the market's penchant for plugging those holes prior to big trend moves higher or lower.

On-balance volume (OBV) adds to the mixed technical outlook, entering a 2014 distribution wave that ended with price in early 2016. The indicator has made limited progress since that time and is now situated near the midpoint of the broad decline. This placement generates a major bearish divergence, signaling inadequate buying power to sustain the current upside. This deficiency also suggests that a failed breakout is in the cards.

The Bottom Line

Caterpillar stock has broken out to an all-time high, but mixed technicals suggest that the rally will eventually fail and generate a steep decline that could fill gaps down to the mid-$80s. (For additional reading, check out: The Biggest Risks of Investing in Caterpillar Stock.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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