Updating 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 changed.

Caterpillar shares have held the $80 per share level like a major wall of overhead resistance, as we’ll see in this update, and now it’s time to turn back to simple insights as to whether buyers will break through this level… or whether shares will fall.

Let’s zoom-in on the daily chart to see what’s happened – or not happened – in October:

My original post was interestingly titled:  “Strange New High Victory for Caterpillar Turned into Agonizing Defeat,” where I referenced the successful push to this level and the ‘defeat’ in that buyers could not push beyond it.  One month later, shares remained mired at $80.00.

This is a great example in how simple technical analysis at key support or resistance levels can have a major affect on investor/trader sentiment and become almost self-fulfilling prophecies.

Despite a few nicks above $80, there hasn’t been a sustained close in October.

Volume has steadily declined – though technically at a  higher relative level – in October, which is consistent with rotation or possibly distribution (we’ll soon know which).

The rising 20 day EMA – currently at $78.50 – has served as decent support, but not enough room to play highly profitable trades between $78 and $80 unless you’re an active intraday trader.

For swing traders, the decision comes down to this:

“Will Caterpillar break solidly above $80 and carry even higher in a breakout trend continuity move… or will sellers overtake buyers here and form at least an intermediate term top (leading to a retracement) here at $80.00?”

The simplicity is identical to my post from this weekend on the S&P 500:

“The Simple but Critical Level to Watch on the S&P 500”

that basically boils down all the complex analysis into a similar simple statement:

“The S&P 500 is at a key multi-timeframe level at 1,200/1,220.  Either it’s going to breakout and spur a new trend move higher, or it isn’t, and will retrace potentially sharply down from here.”

And like the S&P 500, Caterpillar being a highly watched component of the S&P 500 (and Dow Jones), Caterpillar will break out to new highs and likely birth a new trend move… or it won’t.

This type of logic is in line with Mark Douglas’ teachings in Trading in the Zone where he stated that sometimes the best trades come from simply waiting for price to hit a major, well-known inflection point where it either HAS to break through or HAS to turn back, but cannot stay at the level indefinitely.

This type of thinking helps remove bias, temper expectations, and perform more in line with the realities of the markets – that price really can do anything and only price is king.

And that moves off major inflection points often produce decent-sized moves that traps one side of the market the wrong way.

With the major news announcements of Wednesday (election results and Fed policy announcement), we’re likely to get our answer one way or the other!

(Hint – this type of logic is applicable to many stocks right now – not just Caterpillar)

Corey Rosenbloom, CMT
Afraid to Trade.com

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

1 Comment

One Response to “Updating Caterpillar CAT at the 80 Wall of Resistance”

  1. Quick Profiles in Breakout Trading Stocks CAT XOM and F | Afraid to Trade.com Blog Says:

    […] I’ve been very interested with Caterpillar (CAT) at the $80 level for a “Break or No Break” situation – this morning, we broke hard to the upside […]