Strange New High Victory for Caterpillar CAT Turned into Agonizing Defeat

Sep 30, 2010: 12:07 PM CST

If you’ve been watching shares of leading stock Caterpillar (CAT) recently, you probably noticed something extraordinary unusual – at least from a price standpoint.

In a permanent reminder of why watching price levels on the higher timeframe is important to both investors and traders, Caterpillar shares again brushed up into an overhead brick wall of resistance at the $80 per share level, paused for a very long time intraday yesterday, breached the level for the first time ever this morning… and then subsequently collapsed in a painful sell-off for CAT bulls.

Let’s start with the monthly frame and then inch our way down to the lower frames to see this unique development… and lesson.

I don’t intend to do full-scale technical analysis on CAT, but mostly to point out the prior price rejections at the $80 per share overhead “Brick Wall” level in 2007 and 2008.

It’s really neat to see a level so clearly hold as resistance – you don’t need fancy chart indicators to clue you in that $80 is a very important level that investors find to be too expensive for shares of the company.

So, $80 is clearly key to whether this rally will continue (likely if above) or be stopped again dead in its tracks – as has been the case twice before.

I wanted to show these intraday charts more for education reference than “take action now” – this is a lesson in how to combine higher timeframe levels (resistance at $80, for example) with intraday behavior (a clear pause at the level… and breakdown this morning).

Let’s drop it to the 30-min level now:

It’s not that I’ve never seen anything like this, but it’s cool when it happens in real-time before your eyes.

Caterpillar buyers struggled against sellers at the $80 level, and this has been occurring since the price impulse to the $80 level on September 24th.

Like the stock market as a whole, Caterpillar struggled at the highs of the last few days and formed a similar rising trendline pattern into overhead resistance.

This is price purism at its finest – in terms of overhead resistance really mattering for intraday traders and investors.

And after shares of Caterpillar witnessed the “Thrill of Victory” this morning by pushing above $80.00 for the first time ever… the “Agony of Defeat” immediately set in:

Ouch.

Can’t say that the chart didn’t warn you that $80 was an important level – it was the case in 2007 and 2008 … and perhaps now we’ve locked in another annual high at $80 in 2010.

Keep monitoring the share price at this level – a rise back above $80 certainly is not impossible, but participants should be aware of the importance of $80 as a widely known level of overhead resistance.

It’s also a lesson in the importance of pulling back the perspective on shorter timeframes to make note of major price levels – simple price levels – on higher timeframe charts.

They often matter on lower frames, and if you don’t know those levels are there, you’ll likely be blindsided unnecessarily.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

3 Comments

3 Responses to “Strange New High Victory for Caterpillar CAT Turned into Agonizing Defeat”

  1. Don-Da-mon Says:

    Perhaps you could have a longer view picture review of the S&P with special attention to end of quarters/ end of year? Can you tell if the funds would want this rally to last till end of Oct, or would they prefer the S&P dropping or rising here? Volume indicators/Weekly views might give a hint.

  2. Answering Service Says:

    What program do you use for these charts?

  3. Updating Caterpillar CAT at the 80 Wall of Resistance | Afraid to Trade.com Blog Says:

    […] Caterpillar CAT at the 80 Wall of Resistance Nov 2, 2010: 10:31 AM CST I posted a recent update on Caterpillar (CAT) on September 30th, noting the price at the $80 level, and one month later… not much has […]