Caterpillar Inc. (CAT) stock crashed 35% from its all-time intraday high of $173.24 set during the week of Jan. 19, 2018, to its 52-week low of $112.06 set on Oct. 29. This bear market decline has been consolidated since then, and the stock is now "too cheap to ignore" fundamentally. The stock has a P/E ratio of just 10.92 and offers a generous dividend of 3.37%, according to Macrotrends. This makes the stock a candidate for the 2020 "Dogs of the Dow."
The stock has a negative weekly chart, but shares of Caterpillar should be bought on weakness to its "reversion to the mean" at $112.82. The stock has been above its 200-week simple moving average since the week of Nov. 11, 2016, when the average was $86.07.
So far in 2019, Caterpillar stock is down 4%, but it is up 8.9% from its Oct. 29 low of $112.06. However, the stock remains in bear market territory at 23.4% below its 2019 high of $159.37 set on Oct. 3.
Caterpillar makes gas-powered equipment for the farm and heavy earth moving machines used in construction. China is one of its biggest markets, which has been a drag on the stock because of the country's slowing economy and tariffs due to the trade war. Goldman Sachs downgraded Caterpillar stock to neutral from buy and cut its price target to $130 from $156. My price target is its semiannual risky level at $145.60.
The daily chart for Caterpillar
The daily for Caterpillar shows that the stock has had its 50-day and 200-day simple moving averages flip-flopping during 2019, which is why I am ignoring both "golden cross" and "death cross" formations, focusing instead on investor reactions to earnings reports.
There was a price gap lower on earnings released on Oct. 23 and additional gaps lower on earnings released on Jan. 28 and April 24. The annual value level for Caterpillar stock is $114.11, with a monthly pivot at $129.20 and a semiannual risky level at $145.60. Above the chart is the quarterly risky level at $170.98.
The weekly chart for Caterpillar
The weekly chart for Caterpillar is negative, with the stock below its five-week modified moving average of $129.15. The stock is above its 200-week simple moving average, or "reversion to the mean," at $112.81, last tested during the week of Nov. 11, 2016, when the average was $86.07. The 12 x 3 x 3 weekly slow stochastic reading is projected to fall to 52.06, down from 62.61 on Aug. 2.
Trading strategy: Buy Caterpillar shares on weakness to the annual value level at $114.11 and add to positions on weakness to the 200-week simple moving average at $112.81. Reduce holdings on strength to its monthly and semiannual risky levels at $129.20 and $145.60, respectively.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on July 31. The quarterly level was changed at the end of June.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.