Caterpillar (CAT), the largest maker of mining and construction equipment is currently trending comfortably above the 50-, 100-, and 200- period Simple Moving Averages, on the hourly, 240-minute, daily, weekly and monthly charts. While the stock has underperformed when compared to the S&P 500 and the Dow Jones Industrial Average, it may be a solid buy during what may become a range bound 2014.
The main reason for the limited rally in CAT was that it has consistently missed earnings estimates. It is currently trading at 14X heavily reduced earnings estimates and still has a potential tax problem looming that could mean it may have to pay billions in back taxes. Caterpillar is disputing the Internal Revenue Service claim that it owes more. Caterpillar operates in 180 countries and believes their tax strategy for overseas profits is correct. At the end of this week, we should find out who will testify for CAT. Yesterday CAT closed 1.8% higher.
Optimism about construction is likely to support CAT in the 2nd and 3rd quarter. Non-residential construction is expected to improve. A bottom in coal is also positive for their mining products. Once the tax situation is resolved, then the path should be fairly bullish.
Price action on CAT is currently forming a bearish ABCD pattern at the $100.21 level. If this pattern is invalidated and price rallies to $101.50, which is the 108.9% Fibonacci Expansion level of the 2013 high to low move, price may extend to the $105.20 level. Further upside may target the $112.00 area. A bullish stance will remain in place as long as $92.50 is not reached.
The trade: Buy CAT at $101.50 with a stop loss at $99.50 and a take profit at $104.50. The Risk/Reward Ratio is 2:3
Edward J. Moya
WorldWideMarkets Online Trading