Planning a Range Fade or Breakout Trade for Caterpillar CAT

Dec 20, 2013: 2:42 PM CST

I enjoy studying clear range patterns – like the one we’re seeing in Caterpillar (CAT) shares currently – because it makes trade planning parameters relatively simple.

A trade is simply a “bet” on one outcome over the other, where the potential gain outweighs the potential loss; price trading into inflection points like this fulfills this criterion, even if we aren’t making a prediction on what exactly will unfold.

Let’s take a quick look at Caterpillar’s structure, pattern, and key trading inflection level that will generate either a bullish breakout opportunity or another “Range Fade” downside target opportunity.

Caterpillar CAT Indicator Daily Chart Technical Analysis Breakout or Range Fade Trading Pattern

The first chart is an indicator-heavy view of the 20 and 50 day EMA (green/blue), Bollinger Bands (default), and Volume.

In a sideways/horizontal trading range (as I highlight in the Complete Trading Course Chapter 3), moving averages tend to fail because price ‘chops’ through them (it’s better to remove them from the chart; EMAs tend to work best in trending environments where Bollinger Bands tend to fail).

Here’s such a “pure price” chart with a Fibonacci Retracement grid:

Caterpillar CAT Fibonacci Retracement Key Inflection Levels Chart Grid

An indicator-free chart helps us focus on the key inflection levels at work, particularly as a Sideways Trading Range pattern (almost like a Rectangle Price Pattern) develops.

The three price levels on which to focus currently are the upper resistance into $89.00 per share, the lower support boundary near $82.00 (or $84.00 if we take a rising lower trendline view), and the “Midpoint” Value Area just shy of $86.00 per share.

Throughout most of 2013, sellers took over into the $89.00 level (a good place to get short and place a stop above $90.00) yet buyers took control into $82.00 (similarly, a good spot to buy shares with a stop under $81.00).

For each successful “Range Fade” trade (playing from one side of the boundary to the other), there was a corresponding Failed Breakout event (or traders who bet on a breakout outcome had to cover losses when price returned back inside the range).

We have a similar “Will it Break Out above $90.00 or ‘Fade’ back to $82.00?” situation as we reach the end of 2013.

A breakout trade triggers above $90.00 – with a stop under $89.00 – which has an instant target toward $92.00 per share and potentially higher as shares cut through “Open Air” toward the $98.00 or even $100.00 per share level.

Otherwise, “fade” or range-style traders can short into resistance to bet (place a trade) against a breakout outcome.  Downside targets would include the $85.50 “Midpoint,” $84.00 rising trendline, or even the $82.00 horizontal trendline.

We can see the broader picture on the Weekly Chart:

CAT Caterpillar Weekly Chart Fibonacci Retracement Grid Trade Target and Trigger Levels

Note that the 38.2% Fibonacci Retracement Boundary from the early 2009 low to the 2012 high intersects the $80.00 per share level which has been an importance confluence price level from 2012 to present (it’s just under the lower support trendline now).

Otherwise, the $94.00 per share level similarly has been a weaker confluence target and we can see how price reacted to this level historically.

These are simple planning parameters to guide your thinking; always consider additional information before placing a trade.

This link takes you to a Trend Analysis and Summary report for Caterpillar (CAT) from my affiliate Market Club, though you can use it to run additional stocks through the program for reports on additional stocks you may be considering trading.

Afraid to Trade Premium Content and Membership

Follow along with members of the Daily Commentary and Idealized Trades summaries for real-time updates and additional trade planning parameters as we watch a “hold and bounce” or “break and retrace” scenario play out in the near future.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

2 Comments

2 Responses to “Planning a Range Fade or Breakout Trade for Caterpillar CAT”

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    […] Lesson and Swing Trade Planning from Caterpillar CAT Mar 17, 2014: 1:03 PM CST I’ve been covering the price breakout and impulsive trend move up for Caterpillar (CAT) shares.  Recently, shares reached a key price target which gives us a chance to study a quick lesson and […]

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    […] been covering the price breakout and impulsive trend move up for Caterpillar (CAT) shares.  Recently, shares reached a key price target which gives us a chance to study a quick lesson and […]