Bears To Feast On Caterpillar

On April 13, 2017, Caterpillar ( CAT ) crossed below its 50 and 100 day moving averages (DMA). Historically the stock has crossed below the 50 DMA 444 times, the 100 DMA 348 times and both have occurred on the same day 72 times. For all of these instances, the stock does not always drop over the following 11 trading days. The 50 DMA cross has a median loss of 3.627% and a maximum loss of 33.865% while the 100 DMA cross has a median loss of 2.829% and a maximum loss of 21.035%. When both crosses occur on the same day, the median loss is 2.528% and maximum loss is 19.584%.

When we take a look at other technical indicators, the relative strength index ( RSI ) is at 45.6290. RSI tends to determine trends, overbought and oversold levels as well as likelihood of price swings. I personally use anything above 75 as overbought and anything under 25 as oversold. The current reading declares the stock is relatively neutral, but has been heading down.

The true strength index (TSI) is currently -0.9828. The TSI determines overbought/oversold levels and/or current trend. I solely use this as an indicator of trend as overbought and oversold levels vary. The TSI is double smoothed in its calculation and is a great indicator of upward and downward movement. The current reading declares the stock is moving up.

The positive vortex indicator ( VI ) is at 0.9853 while the negative is at 0.8779. When the positive level is higher than 1 and higher than the negative indicator, the overall price action is moving upward. When the negative level is higher than 1 and higher than the positive indicator, the overall price action is moving downward. The current reading declares the stock is drifting down with both indicators remaining below 1.

The stochastic oscillator K value is 66.0377 and D value is 77.5211. This is a cyclical oscillator that is highly accurate and can be used to identify overbought/oversold levels as well as pending reversals and short-term activity. I personally use anything above 80 as overbought and below 20 as oversold. When the K value is higher than the D value, the price action is trending up. When the D value is higher that the K value, price action is trending down. The current reading declares the stock is exiting overbought territory. This indicates the stock will begin to fall soon.

Considering the moving average crossover, RSI , TSI, VI and stochastic levels, the overall direction appears to continue heading down. Based on historical movement compared to current levels and the current position, the stock could drop another 2.25% over the next 11 trading days.

The most recent same day crosses outside of the current trend channel were in November 2013, September 2013, October 2013, December 2013, and September 2014. The respective losses were 2.526%, 2.530%, 0.624%, 0.823%, and 6.123%.

FUNDAMENTAL TAKE: Another consideration with CAT earnings approaching is our current economic state. After the election, CAT surged on hope of construction jobs in the near-term due to projected presidential policies. The construction and policies are yet to fully take shape and the price of the stock could not only appear too high, but not much has changed regarding the earnings of the company. With the stock being propped up with nothing to justify it, earnings day could be a major wakeup call for investors which could easily be the catalyst for this stock to drop to 91 or even sub-90.
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