Caterpillar’s Stock…

If Charts Could Talk

This chart of Caterpillar tells a great “before and after” story. It’s also a textbook example of “resistance, once broken, becoming support.” That’s technical analysis speak, so let me explain…

Caterpillar’s stock bottomed in 2009 at $22. Then it rallied 327% in a little more than a year. But it had a hard time getting over the $72 level. You can see (in red) that $72 acted as resistance, stopping CAT’s price advance twice.

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CAT eventually broke above the $72 resistance level and traded as high as $116 in May of last year. But then came the general market selloff of last summer and Caterpillar was dragged down with it.

Then an interesting thing happened… as Caterpillar was dropping back into that familiar $72 range, its decline halted. The resistance became support.

If charts could talk, this one would say: “Wait. $72? We’ve been down the $72 road before. We’re not a $72-stock now. We’re better than that.”

Investors showed confidence in Caterpillar’s ability to adapt to the difficult economy. They snatched up shares at $72, a new bargain price, and rode the stock back up to $116 for a gain of 161%.

Looking ahead, the trend is still up for Caterpillar. We may soon have a good buy opportunity as CAT pulls back into the Fibonacci Buy Zone between $86 and $92. This is the sweet spot, where CAT is a good value. We’ll keep an eye on this opportunity.

If you haven’t done so already read the Survive & Prosper issue on “Caterpillar Proves Deflationary Period is Alive and Well.” Caterpillar adjusted to the economic downturnrn quickly by supplying the growth in China. Thus avoiding any deflationary pressures.

 

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.