Caterpillar Inc. (CAT) stock is 39.1% below its all-time intraday high of $173.24 set on Jan. 19, 2018. The stock is also in bull market territory at 20.5% above its March 12 low of $87.50. Caterpillar has had a tough time when reporting earnings for several quarters in a row. It beat estimates on Jan. 31, 2020, missed on Oct. 23, 2019, missed on July 24, 2019, and beat on April 24, 2019.

The stock is cheap, with a P/E ratio of 9.99 and a dividend yield of 3.73%, according to Macrotrends. 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 its slowing economy and tariffs due to the trade war. The company is also suffering from the economic slowdown caused by the spread of COVID-19.

The daily chart for Caterpillar

Daily chart showing the share price performance of Caterpillar Inc. (CAT)
Refinitiv XENITH

The daily for Caterpillar shows that the stock has been chopping back and forth around its 50-day and 200-day simple moving averages over the past 52 weeks. The stock traded as high as $150.55 on Jan. 2, but it has been all downhill since then.

Caterpillar stock slipped below its annual pivot at $134.44 on Feb. 24, when it also failed to hold its 200-day simple moving average at $131.70. The stock failed to hold its monthly pivot at $127.49 on March 4 and then failed to hold its quarterly pivot at $121.54 on March 6. The shares then gapped lower before trading as low as $87.50 on March 12. The stock stabilized last week by rebounding above its weekly pivot at $98.78.

Note the formation of a "death cross" on March 16, when the 50-day simple moving average crossed below the 200-day simple moving average. This sell signal will likely limit the upside potential over the next several weeks.

The weekly chart for Caterpillar 

Weekly chart showing the share price performance of Caterpillar Inc. (CAT)
Refinitiv XENITH

The weekly chart for Caterpillar is negative, with the stock below its five-week modified moving average of $117.36. The stock has been below its 200-week simple moving average, or "reversion to the mean," at $123.04 over the past three weeks.

The 12 x 3 x 3 weekly slow stochastic reading ended last week at 20.83, down from 21.03 on March 20. This reading was above 90.00 at the January high, putting the stock in an "inflating parabolic bubble" formation, which has popped.

Trading strategy: Buy Caterpillar shares weakness to the weekly pivot at $98.78 and reduce holdings on strength to the quarterly, monthly, and annual risky levels at $121.54, $127.49, and $134.44, respectively.

How to use my value levels and risky levels: Stock closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes on these time horizons.

Monthly levels for March were established based upon the Feb. 28 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

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.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.