Caterpillar Stock's Relief Rally at Risk After Weak Quarter

Dow component Caterpillar Inc. (CAT) is trading flat in Tuesday's pre-market session despite missing first quarter 2020 top- and bottom-line estimates by slim margins. The equipment giant posted earnings per share of $1.60, coming in $0.07 below analyst consensus estimates, while revenues plunged 21.0% year over year to $10.62 billion. The company withdrew fiscal year guidance on March 26, citing the impact of the coronavirus pandemic, and it reiterated that uncertainty during the earnings presentation.

Heavy equipment sales are highly cyclical, increasing during periods of economic expansion and decreasing during periods of economic contraction. However, sector performance can ignore that oscillation when a one-time event takes control, as it did 20 years ago when China embarked on a massive multi-year industrialization project. Caterpillar shares attracted intense buying interest throughout that period, but it wasn't enough to prevent a 75% decline during the 2008 economic collapse.

The stock has struggled since the start of 2018, when President Donald Trump fired the first shot of the trade war with China. That initiative slowed the flow of worldwide equipment sales, generating a persistent downtrend that has carved a long series of lower highs. The decline accelerated to a three-year low during March's pandemic-driven rout, while the rapid economic downturn increases the odds for lower prices in coming quarters.

CAT Long-term Chart (1992 – 2020)

The stock bounced at four-year support in 1992 and broke out to a new high one year later, entering a strong uptrend that stalled in the low $30s in 1997, when the Asian Contagion raised fears of an economic catastrophe. A 1999 breakout attempt failed, yielding a steady downtick to a four-year low in January 2001, followed by a successful retest that completed a double bottom reversal in October 2002.

The stock broke out once again in 2003, entering a historic advance driven by heavy China equipment demand. A 2005 two-for-one split stoked buying interest, underpinning a final buying impulse into 2006's high at $82.03, ahead of failed breakout attempts in July 2007 and April 2008. Subsequent price action completed a triple top breakdown six month later, triggering a panic-driven decline that finally ended at a six-year low in the first quarter of 2009.

China sales picked up into the new decade, underpinning a V-shaped recovery wave that completed a round trip into the prior high in December 2010. The stock broke out in early 2011 and stalled above $116 just five months later, generating a rapid decline into the mid-$60s. Those extremes contained price action for the next four years, ahead of a 2015 range breakdown that ended at a six-year low in January 2016.

The stock mounted 2010 resistance in the third quarter of 2019, posting an all-time high at $173.24 in January 2018. The subsequent downturn carved a trendline of lower highs into the fourth quarter of 2019, yielding a breakout that failed just above $150 at the start of 2020. It has been all downhill since that time, with a 42% sell-off ending in mid-March at the lowest low since the 2016 presidential election. 

CAT Short-Term Outlook

The first quarter decline carved the third successful test at the 200-month exponential moving average (EMA) since 2009, raising the odds for a long-term low. However, it also broke down from a multi-year double top, generating new resistance above $115. The stock lifted above that level at the start of April and reversed, settling into a range between $109 and $116. Tuesday's post-news reaction has failed to mount that barrier, which has aligned with the 50% retracement of the 2016 into 2018 uptrend.

In addition, the monthly stochastic oscillator entered a sell cycle from the overbought zone in January 2020 and is now stretching through the panel's midpoint. This indicates that committed bears remain in control of long-term price action, despite the short-term uptick. Taken together with the double top breakdown, the stock is likely to lose altitude in coming weeks, setting up a critical test at the March low.

The Bottom Line

Caterpillar stock is running in place at resistance after the equipment manufacturer missed profit and revenue estimates, raising the odds for a downturn that needs to hold support in the upper $80s.

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