The Caterpillar Compression CAT Play

Oct 9, 2015: 10:36 AM CST

Many stocks are catching reversals off lows, and Caterpillar (CAT) may be no exception, but let’s focus our attention right now on the “Caterpillar Compression” Play that’s developing right now.

Let’s chart this development and update our trading levels for Caterpillar (CAT):

Caterpillar (CAT) has been a downtrending stock in the Dow Jones which was showing relative weakness.

It’s still relatively weak, but shares have enjoyed a strong rally up off the lows near $64.00 per share.

At this point, shares face the challenge of one of my favorite patterns:  The EMA Compression.

Share prices have rallied straight up but are trapped in the space between the falling 50 day EMA and the rising 20 day EMA.

These price levels are $73.02 and $69.90 respectively as the price currently trades near $71.70.

There’s not really a play (trade) as price bounces between these levels, but the next opportunity would be to join with the winning side – bull or bear – on a breakout beyond these levels.

Keep in mind that the trend remains down and volume continues to be strong on the sell-side.

This would suggest that a breakdown under $70.00 per share – and another short-sell opportunity – may be more likely than the bullish breakout scenario which would trigger above $73.00.

For the two price pathways – the Breakout Plays – look to $78.00 then $81.00 for the “upside trend reversal” thesis.

However, the bearish breakdown and pro-trend play would trigger under $70.00 per share and target $64.00.

I like the “EMA Compression Play” because it gives us a chance to pause and take a collective breath before letting the market pull us into a trading position – without prediction.

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Corey Rosenbloom, CMT
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