Caterpillar Claws through the Competition

Apr 18, 2008: 10:32 AM CST

Not to be outdone today, Caterpillar Inc (CAT) also clawed its way higher today via overnight gap thanks to better than expected earnings.

Caterpillar is a Dow Jones Index component, and is a heavy machinery company that does business across the globe. Overseas sales have boosted this company’s profit margins, despite a slowing American economy and potentially reduced demand for the need for construction and heavy machinery to fulfill construction needs. Remember that a weak US Dollar often benefits large multinational companies.

According to an Associated Press article this morning, “Heavy equipment maker Caterpillar Inc. said Friday that demand for its global mining and energy products pushed first-quarter earnings up 13 percent, far surpassing Wall Street estimates. Its stock surged.

The results showed continued weakening in North America, where the economy has weighed on sales, but better-than-expected strength internationally as Caterpillar sales overseas benefited from the weak dollar.

Caterpillar said it earned $922 million, or $1.45 per share, in the January-March period compared with $816 million, or $1.23 per share, in the year-ago quarter. Analysts surveyed by Thomson Financial had been expecting earnings of $1.33 per share.

Revenue rose 18 percent to $11.8 billion from $10.02 billion a year earlier — fully $1 billion above analyst estimates. Sales increased 4 percent in North America and 30 percent internationally.”

A peak at the weekly chart shows longer-term strength and the high possibility that the stock will reach and exceed all-time highs soon:

I did want to highlight that the January 2008 (around the 22nd) weekly “candle” pattern was a significant one. Notice where the large white candle gaps lower than the previous red (sell) candle and almost ‘engulfs’ the red candle. Had the stock completed a full ‘engulf’ where the close would have exceeded the previous week’s open, this would have been a powerful bullish engulfing pattern.

Instead, the pattern was a “Piercing Pattern,” which often is a strong bullish reversal pattern where a stock gaps down, exhausts supply (sellers) in a shock move, and then creates a vacuum to the opposite side (buyers) which closes deeply within (at least a 50% penetration) of the previous week’s candle.

This was also considered a “Key Reversal” week or a capitulation bottom example. Call it what you will, it was a powerful reversal signal, and since that day, price has scarcely looked back.

Let’s see how price behaves when it does test the prior high. Should it break the high, I would say there’s definite life in this stock. Keep an eye on it!

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