Caterpillar Stock Could Offer Low-Risk Buying Opportunity

Dow component and construction giant Caterpillar Inc. (CAT) has broken out above 21-month resistance, shaking off anxiety about an economic slowdown and escalating trade war while setting the stage for impressive gains in the coming months. Better yet, the initial rally wave reversed last week, raising the odds for a low-risk buying opportunity at or near new support in the low to mid-$130s.

This early cyclical play is supposed to perform best at the beginning of an economic expansion, when industrial and agricultural spending tends to increase at a rapid pace. Of course, we've just entered the second decade of the current growth cycle, well past the time that this stock should be engaged in a strong uptrend. However, optimism about a trade deal has reinvigorated the stock market and economic outlook, bringing skeptical investors off the sidelines.

CAT Long-Term Chart (1992 – 2019)

A multi-year downtrend posted a six-year low at a split-adjusted $4.70 in 1992, ahead of a strong uptrend that stalled in the low $30s in 1997. A 1999 breakout attempt failed, reinforcing range resistance while giving way to a decline that ended at a four-year low in the upper teens in the fourth quarter of 2002. That marked the lowest low in the past 19 years, but the subsequent uptick failed a second breakout attempt in 2002, yielding another round of range-bound action.

A 2003 breakout caught fire, posting strong upside during the mid-decade bull market. Industrial spend in China was ramping up at a historic pace at that time, requiring all sorts of equipment purchases. The uptrend stalled near $70 in 2006, yielding a trading range that broke support in the $50s during the 2008 economic collapse. Selling pressure finally ended at a six-year low in 2009, giving way to a V-shaped recovery wave that completed a round trip into the prior high in 2010.

The stock mounted resistance in 2011 but made little progress, with buying pressure drying up above $115 in 2011, at the same time that commodities were topping out around the world. China was the culprit once again, reporting a slight decline in its torrid GDP growth rate, signaling a slowdown that is still in progress more than eight years later. Price action held relatively narrow boundaries into 2015 and broke down, hitting a six-year low in the first quarter of 2016.

A September 2017 breakout carved a rapid advance into January 2018's all-time high at $173.24. President Trump then fired the first shot in the trade war, triggering a sharp reversal, followed by steady downside into the November low at $112. The stock tested that level successfully in September 2019 and turned sharply higher, completing a double bottom reversal and major breakout above a 21-month descending highs trendline in late October.

Outlook Into 2020

The monthly stochastics oscillator has carved a progressively bullish pattern since June 2018, grinding higher in a shallow buy cycle that's finally nearing the overbought level. This is a beneficial zone, predicting that bulls will retain control through the fourth quarter of 2019. As a result, pullbacks to support following the trendline breakout should offer buying opportunities, ahead of higher highs into the new decade.

The initial rally wave reversed last week near the .50 sell-off retracement level at $150 and could drop through the .382 retracement level and reach the trendline in the coming weeks. That price zone should generate strong support and a fresh recovery wave that lifts into a higher reward target at the .618 retracement near $160. That harmonic barrier marked strong resistance through the middle of 2018, raising the odds that the stock will post another intermediate high near that price zone.

The Bottom Line

Caterpillar stock has broken out above strong resistance in the $130s and could post significant upside in coming months.

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