Dow component Caterpillar, Inc. (CAT) dazzled market watchers on Tuesday morning, lifting more than 6% into triple digits after solid first-quarter results and higher fiscal year 2017 guidance. Increased Chinese volume underpinned exceptionally high buying interest after the news, with that part of the world providing the company’s primary growth engine for the last two decades.  

The release arrived at a perfect time for beaten-down shareholders still reeling from last month’s highly publicized Federal search warrants. The government raided the company’s Peoria, Illinois facility on March 2 as part of a multi-year criminal investigation into CAT’s overseas tax strategy, inadvertently highlighting President Trump’s sharp criticism of tax avoidance schemes.

CAT Long-Term Chart (1994-2017)

CAT

The stock topped out at $9.34 in 1987 and pulled back, returning to resistance in 1993. A breakout into 1994 caught fire, generating a powerful trend advance that topped out at $30 in 1997. A 6-year basing pattern bounded by that high yielded a 2003 breakout that posted impressive gains through the mid-decade bull market. Buying pressure finally waned in the mid-70s in 2006, giving way to a topping pattern that broke to the downside during the 2008 economic collapse.

Selling pressure continued into March 2009, dropping the stock to a 6-year low at $21.71, ahead of a V-shaped recovery wave that completed a 100% retracement into the prior high at the end of 2010. A 2011 breakout stalled above $110 just 6-months later, yielding sideways action into a 2015 breakdown and downtrend that found support in early 2016 at a 5-year low.

The 2016 bounce unfolded through multiple buying waves that recaptured broken 2012-2015 range support near $80 in July. Buying pressure eased a few months later in the upper-90s, giving way to choppy sideways action into this week’s breakaway gap into triple digits. Despite the euphoria, the stock is still trading more than 12-points below long term range resistance at $116.  

Sidelined players interested in owning the stock should take note of the red trendline of lower highs in place since the 2011 top, now centered at the .786 retracement of the 2011 into 2016 downtrend near $105. The post-earning rally has reached within a point of this resistance level, which is likely to trigger a sizable reversal or loss of momentum. In turn, reward: risk has shifted firmly against new positions taken in reaction to the bullish news.

CAT Short-Term Chart (2015–2017)

MCD

A Fibonacci grid stretched across the 2014 into 2016 downtrend organizes price action, with the November 2016 gap above resistance at the .618 retracement running into a secondary barrier at the .786 retracement. This week’s rally has mounted that level, opening the door to a continued advance into the 2014 high at $110. Notably, this projected outcome conflicts with long-term channel resistance (red line), predicting two-sided action that pivots off both price levels.

On Balance Volume (OBV) fell off a cliff in the second half of 2014, signaling a distribution wave that preceded the price breakdown by many months. It bottomed out in December 2015, but 2016 gains have been insufficient to lift the indicator within striking distance of the prior high. However, that could change as sidelined market players get a fresh bite at the apple in coming sessions.

The Bottom Line

Caterpillar has broken out into triple digits after a surprisingly strong earnings report but faces stiff resistance centered at $105 and $110. This predicts a two-sided tape, with many whipsaws before one side wins the battle and takes control. Bulls have the advantage at this point, but that isn’t a sure thing with a criminal investigation clouding the company’s long-term outlook.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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