Caterpillar Inc. (CAT) stock posted a 23-month high last week, defying the odds that the highly cyclical Dow component would underperform during a period of economic stress. The rally since March has posted healthy buying interest at every phase, indicating that the run-up isn't an algorithmic game designed to benefit insiders. Even so, new buyers at these lofty prices are unlikely to book quick profits because the stock is still trading below major 2018 resistance levels.

Key Takeaways

  • Caterpillar stock has posted strong gains since March, despite cyclical headwinds.
  • The rally has now reached strong resistance at the $150 level.
  • The stock is still trading below major 2018 resistance levels.
  • A selloff should hold 200-day moving average support in the low $130s.

The company has a well-deserved cyclical reputation because it serves industrial sectors that spend more money on construction equipment during periods of economic expansion than during recessions and other downturns. The upward trajectory of industrial activity since March is underpinning the uptick, but metrics remain well below prior years due to consistently high unemployment and the reluctance of big business to expand into new territories.

Of course, the market is already looking past the winter of 2020, which could bring a second infection wave, and toward an effective vaccine that takes the lid off economic growth. But that path may be filled with unanticipated obstacles because vaccines usually take years to produce, rather than months, and this is an election year in which false claims can win key votes. Given the uncertainty, chasing Caterpillar stock right here looks like a weak-handed buying strategy.

Wall Street has maintained a split view of the long-term outlook for Caterpillar shares, with a consensus "Moderate Buy" rating based upon eight "Buy" and seven "Hold" recommendations. One analyst now recommends that shareholders sell their positions and move to the sidelines. Price targets currently range from a low of $111 to a Street-high $164, while the stock is trading just $15 below the high target. There isn't much room for upside in this configuration unless analysts raise targets, and that seems unlikely given disappointing August sales.

A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It has typically been recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.

Caterpillar Long-Term Chart (2010 – 2020)

Long-term chart showing the share price performance of Caterpillar Inc. (CAT)
TradingView.com

A 2010 rally above the 2007 high at $87 topped out near $116 in 2001, giving way to a complex sideways pattern that failed the breakout in 2015. The decline found support at a six-year low in the mid-$50s in the first quarter of 2016, ahead of a steady uptick that broke out to a new high in September 2017. It posted an all-time high at $173.24 just four months later and rolled into a downtrend that gathered steam in February 2020.

Uptick describes an increase in the price of a financial instrument since the preceding transaction. An uptick occurs when a security's price rises in relation to the last tick or trade. An uptick is sometimes also referred to as a plus tick.

Caterpillar Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Caterpillar Inc. (CAT)
TradingView.com

The selloff ended at a four-year low in the $80s, while the subsequent recovery wave just completed a 100% retracement into the January high at $150.55. That marks natural resistance, so this week's reversal makes perfect sense, and right now, the pullback just needs to hold a three-month rising trendline near $142 in order to maintain upside potential. However, that task could be tougher than it sounds, given bearish price history at last week's high tick.

The price zone marks the .786 Fibonacci retracement of the two-year downtrend, denoting a high-odds reversal level that is now perfectly aligned with the completed V-shaped recovery pattern. Second, take a look at trading around the $150 level in the past two years, and you'll see seven high-percentage reversals. Other traders and investors are probably looking at the same the same thing right now and considering how to protect their profits.

The Bottom Line

Caterpillar stock has entered a high-odds reversal zone, but the long-term outlook has brightened considerably, with downside potentially limited to strong support near $130.

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