What’s Next for This Bellwether Stock

Editor’s Note: Today, we’re handing the reins to colleague Larry Benedict – a market wizard and legendary hedge fund manager.

Up until the start of April, the world’s largest mining and earthmoving equipment manufacturer was on a tear. And then it rolled over…

Will it go up or down from here? Larry will explain what this bellwether of the global economy could do next, and what it means.

Here’s Larry…

---

Up until the start of April, Caterpillar (CAT) was on a tear.

CAT is the world’s largest mining and earthmoving equipment manufacturer. And it had rallied a massive 70% from its late October low.

But after hitting its all-time high, CAT reversed as buying momentum turned lower.

That down move accelerated last week. CAT’s Q1 revenue narrowly missed consensus estimates, and there was continued weakness in its European market.

Now CAT is trying to rebound and “fill in the gap.” So let’s see where this bellwether of the global economy could trade from here…

A Classic Uptrend

In the chart below, you can see a classic uptrend in action.

CAT saw a sharp rally starting in May. Then it retraced from August through October (where it made a higher low).

CAT’s rally resumed with strong gains through early April this year:

Caterpillar (CAT)

Source: eSignal

Both bullish legs coincided with the Relative Strength Index (RSI) tracking in its upper band (above the green line).

The 10-day Moving Average (MA, red line) crossing above the 50-day MA (blue line) confirmed the move. And both MAs tracked higher.

Note, though, that these patterns reversed when CAT retraced from August to October.

CAT’s rally from late October started with the RSI rallying from oversold territory (lower grey dashed line).

This move corresponded with the blue MACD line crossing above and pulling the orange Signal line higher.

CAT’s rally developed further with the MACD and RSI moving in their upper ranges.

But as CAT continued to make higher highs (upper orange line), the RSI warned about a potential reversal (lower orange line).

When momentum steadily falls like this, it will eventually pull the stock lower, too.

And that is what we saw.

After locking in its all-time high on April 1 at $382.01, CAT rolled over and headed lower. This reversal happened well before CAT announced its Q1 earnings last week.

Despite a lift in margins and CAT accumulating swathes of cash, revenue came in slightly less than expected. CAT now expects 2024 sales and revenue forecasts to be similar to last year’s.

Throw in a weaker European market, and it was enough for shares to gap down.

Yet now CAT is trying to rally off its recent lows. So what should we expect from here?

Improving Momentum

CAT’s gap lower sent the RSI into its lower band (red circle).

Momentum has slightly improved this past week. But unless the RSI can break back into its upper range and stay there, CAT is still vulnerable to a further fall.

The two MAs are moving closer together too. So I’ll also watch for the 10-day MA to cross and accelerate below the 50-day MA as additional evidence of a down move.

Plus, I’ll also be keeping a firm eye on the MACD.

The MACD line crossed below the Signal line right after CAT’s peak (‘A’). Both then moved lower.

Most recently, the MACD line has also broken below the zero (0.00) line.

If this move drags the Signal line lower too, that will add weight to the developing down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict