Shares of Dow component Caterpillar Inc. (CAT) rallied more than 3% in Monday's pre-market  after the company beat second quarter profit estimates by a wide margin and guided fiscal year 2018 above consensus expectations. Revenues slightly missed expectations, but market players focused their attention on upbeat commentary that noted healthy order rates, a solid backlog and unusually strong demand in oil, gas and mining.

The bullish confessional relieved shareholder anxiety following a poorly received first quarter report that triggered an eight-day 23-point decline. The stock has attracted little or no buying interest in the past three months, slumping to an eight-month low in reaction to rising trade tensions. This morning's uptick has lifted the equipment giant above the 50- and 200-day exponential moving averages (EMAs) for the first time since mid-June. 

Even so, it will take tremendous buying power to restore bullish technicals in place until January 2018, when the stock topped out above $173. Caterpillar is still trading in the red for 2018, with multiple resistance levels likely to slow a recovery wave back to the prior high. As a result, it's recommended that market players avoid new positions for now, waiting for sustained buying interest to overcome substantial overhead supply. That might not happen until the fourth quarter, at the earliest. (For more, see: Caterpillar: 6 Things You May Not Know.)

CAT Long-Term Chart (1997 – 2018)

The stock ended a multi-year uptrend just above $30 in 1998 and reversed into a trading range with support in the mid-teens. It broke out to a new high in 2003, booking impressive gains into 2006, when the rally ran out of steam in the low $80s. It posted two nominally higher highs into 2008 and plunged with world markets during the economic collapse, dropping to a six-year low at $21.71 in March 2009.

A V-shaped recovery completed the round trip into the 2008 high in 2010, generating an immediate breakout that stalled at $116 in 2011, at the same time that commodities around the world were topping out. That marked the start of a long period of underperformance that carved a triangle pattern, followed by a 2015 downtrend that ended in the mid-$50s in January 2016. It returned to 2011 resistance in August 2017 and broke out, gaining more than 50 points into January 2018's all-time high at $173.24.

The stock sold off into February 2018, with trade tensions rattling world markets. The monthly stochastics oscillator crossed into a sell cycle in reaction to the decline but still hasn't reached the oversold level. Price action has posted a series of lower highs and lower lows since that time, but the correction has relinquished just 30% of the massive rally wave that more than tripled the stock's price between 2016 and 2018.

[If you'd like to learn more about recognizing sell cycles and determining whether a stock is oversold, check out the Technical Analysis course on the Investopedia Academy, which includes videos and interactive content to help you improve your trading skills.]

CAT Short-Term Chart (2017 – 2018)

The complex pattern in place since January 2018 has carved resistance at $160 and a declining trendline that is now approaching $130. This has generated an efficient engine to shake out weak hands, with the stock reversing after taking out stops placed under the prior lows. The decline still hasn't hit long-term harmonic support, with the last selling wave ending four points above the .382 Fibonacci retracement level. On-balance volume (OBV) fell to a six-month low in June but is holding well above early 2017 levels.

The May into June sell-off posted the largest loss since February while carving the outline of a potential Elliott five-wave pattern that may be engaged in a fourth wave bounce. If so, the current uptick will fail to reach $152, which marks the June 15 gap that initiated the potential third wave decline. Conversely, a rally through that resistance level will negate the Elliott pattern, signaling more bullish price action consistent with the last stage of an intermediate correction. (To learn more, see: Elliott Wave in the 21st Century.)

The Bottom Line

Caterpillar stock is surging higher after a bullish second quarter report but remains stuck in a complex correction that will take tremendous buying power to overcome. A buying thrust above $152 would aid that healing process, while a reversal at that level may presage a decline into the $120s. (For additional reading, check out: The Biggest Risks of Investing in Caterpillar Stock.) 

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