Caterpillar CAT at Vitally Important Juncture

January 7, 2009

While browsing through charts this evening, I came across a significant development in Caterpillar (CAT) that might be worth your attention.  We have strong support on the daily chart and possible resistance overhead on the weekly chart - which one will break?  Let’s look at these developments.

Caterpillar (CAT) Daily:

Without going into complex technicals, I did want to highlight a couple of major points.

First, Caterpillar has officially changed its trend to the upside on the daily chart, as confirmed by a higher high and higher low, in addition to price being above both the 20 and 50 day EMA and the 20 is crossing bullishly above the 50 at the moment, setting up a strong level of potential support.

Also, a multi-swing positive momentum divergence preceded this positive price reversal.  Rather than going deeper, I wanted to call your attention to the $42.50 price level, which would represent a Confluence Support Zone or set-up the “Cradle Trade” (when price pulls back to that level, it is expected to hold as support).

However, how far might price go to the upside and what potential barriers might it have on its journey?  It turns out there might be a significant one right where price is now.  Let’s pull up to the weekly chart.

Caterpillar (CAT) Weekly:

There are two majorly significant resistance levels that have developed on the weekly chart.  First, the falling 20 week EMA rests just above price at the moment, and in addition, price is currently finding resistance at the 38.2% Fibonacci retracement of the mid-2008 highs to the November lows.  At the moment, those levels are expected to hold.

If you look at the retracement here on the weekly chart, we see it forming a decent channel which resembles a 45 degree angle.  That structure generally is the quintessential “Bear Flag” trade entry… and given the prevailing downtrend, that might be the structure that dominates.

So, what happens now?  We have potentially strong confluence support on the daily chart and also strong confluence resistance on the weekly chart.  Both can’t be correct… but it’s hard if not impossible to know which structure will hold.

What might be the best play?  A la Mark Douglas, place a buy stop above resistance and place a sell stop beneath support and let the market drag you in - instead of trying to guess what the market is going to do.

I’ll leave it for you to analyze deeper but I wanted to make you aware of an interesting point where we have strong conflicting signals on dual timeframes.

Corey Rosenbloom
Afraid to Trade.com

Originally posted here.

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