Dow component Caterpillar Inc (CAT) faces major crosswinds as the calendar flips into January, and the Trump administration takes control of the U.S. government. On a positive note, the company should benefit from higher local infrastructure spending and growth rates, with its earth-moving equipment needed for all types of projects. However, a trade war with China could unravel those gains, with revenues highly dependent on continued growth in the BRIC nations.

The stock has been on the recovery trail throughout 2016, lifting off a 5-year low in January and then reaching a 2-year high after the election. It hasn’t posted a new high in three weeks, signaling a consolidation period that may continue into the quarterly earnings release on January 26. The new Republican Congress will convene at the same time, allowing the reality of policy making to replace post-election speculation.   

CAT Long-Term Chart (1993-2016)

CAT

It bottomed out below $5.00 (post three stock splits) in 1991 and turned sharply higher, gaining ground at a rapid pace into the 1997 high at $30.82. It then eased into a broad trading range that carved a 6-year inverse head and shoulders pattern, testing resistance at the high five times ahead of a 2003 breakout. The subsequent rally unfolded in a series of stair-step highs that culminated in May 2006 at 82.03.

The stock tested resistance in July 2007 and April 2008 but failed to break out, relinquishing control to aggressive selling pressure that broke two-year horizontal support at $59 in September. It then plunged with world markets, losing more than 60% of its value into the March 2009 low at $21.71. A bounce off that 6-year low caught fire into the new decade, reaching the prior high in November 2010 and breaking out in a trend thrust that topped out at $116.55 in May 2011.

A decline into October 2011 got bought, triggering a bounce that ended just 40-cents above the prior peak, ahead of a decline into the upper 70s. A narrow trading range then took control into a 2014 rally that failed at 2011 resistance, reinforcing that barrier while triggering a downtrend that came to rest in the upper 50s in January 2016. The subsequent uptick has retraced about 70% of the decline, with the price now situated in the lower 90s. Meanwhile, the stock has tested the 2010 breakout at $80 (red line) four times, with that level currently offering critical support.

The monthly Stochastics oscillator triggered overbought technical readings in May 2016 and has held that level for the last six months. It crossed over in late October, with just a single weekly selling wave now needed to flip the indicator into a sell cycle that could last a minimum of six to nine months. That positioning tells informed market players to watch price action out of the gate in January for long-term directional signals that could last into mid-year.

CAT Short-Term Chart (2014 – 2016)

CAT

The 2016 recovery wave has carved a rising channel with support now centered in the mid-80s. A breakdown would significantly alter the technical outlook, favoring a continued slide that shows little support until $70. The rally gapped above the .618 Fibonacci selloff retracement level after the election, in a bullish wave that’s held the stock near a 2-year high through December. A gap fill now requires a decline that undercuts that level and sets off intermediate sell signals.

On Balance Volume (OBV) is flashing a bearish divergence after bouncing at a multiyear low in January 2016 because it’s failed to match the price pattern’s enthusiasm. Specifically, the indicator remains stuck at the April high (green line) when the stock was trading 13-points lower, while October, November, and December breakout attempts have failed to attract the needed buying volume.

The Bottom Line

Caterpillar is trading between the .618 and.786 Fibonacci selloff retracement levels after a strong 2016 bounce while accumulation has stalled at April levels. This lack of loyal sponsorship may trigger a long term sell cycle, which now requires just a single week of sharply lower prices.

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