Caterpillar Inc. (NYSE: CAT)

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company operates in multiple segments including Construction Industries, Resource Industries, Power Systems and Financial Products.

Take a look at the 1-year chart of Caterpillar (NYSE: CAT) below with my added notations:

1-year chart of Caterpillar (NYSE: CAT)

Over the last 6 months CAT has created a key level of support at $100 (red), and that $100 level is also the “neckline” support for CAT’s head and shoulders (H&S) reversal pattern. Above the neckline you will notice the H&S pattern itself (blue). This pattern implies an eventual breakdown for the stock.

Remember, patterns such as an H&S need to confirm to have the meaning that they imply. Confirmation of the H&S would occur if CAT were to break below its $100 support.

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The Tale of the Tape: CAT seems to have formed a head & shoulders pattern. Although a long trade could be made at $100, the pattern points towards a break lower. A short trade could be entered on a solid move below the $100 “neckline” support, with a stop placed above that level.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Follow me on Twitter: @cmtstockcoach