This Stock’s Big Rally Is Looking Stretched

With all the hype around AI and tech stocks this year, traders may be tempted to bypass less “exciting” parts of the market like industrial stocks.

But in doing so, they have missed out on some outsized gains.

One of those stocks is Caterpillar (CAT). CAT is the world’s largest manufacturer of construction and mining equipment.

And it has been on a tear.

In just two months, CAT rallied 43% up to its recent all-time high. That put CAT on track for an 83% gain in less than a year.

But now CAT’s momentum is looking stretched. So today I want to check out what’s coming next…

Surging Momentum

CAT bottomed out in September last year.

But as soon as buying momentum returned, it rebounded:

Caterpillar (CAT)

Source: eSignal

CAT’s rally off its low coincided with the Relative Strength Index (RSI) breaking out of oversold territory (lower grey dashed line).

That rally gained steam as the RSI surged through resistance (green line) into the upper half of its range.

Adding to the bullish sentiment, the 10-day Moving Average (MA, red line) crossed and accelerated above the longer-term 50-day MA (blue line).

But after rallying 65% off its September low, CAT’s rally petered out and reversed in late January.

CAT drifted lower through June as the RSI got stuck in its lower range.

When the RSI is trapped in its lower half like this, it means buying momentum has dried up. And it is impossible for a stock to sustain any rally.

Even a big Q1 earnings beat failed to stop CAT’s ongoing slide.

Yet when we checked out CAT on June 14 (red arrow), a promising new rally had just broken out. CAT got a fresh surge of buying momentum. Plus, the 10-day MA crossed above the 50-day MA with both moving sharply higher.

Take another look:

Caterpillar (CAT)

Source: eSignal

Yet after rallying strongly on a Q2 earnings beat, CAT ran into short-term resistance around the start of August (red line).

Despite briefly piercing it, CAT hasn’t gained any traction above this level so far. Simultaneously, the RSI has been trending lower from overbought territory (lower orange line).

So with CAT’s rally hanging in the balance, what am I looking for around here?

Breaking Resistance

During any rally, a stock will periodically run into resistance.

This is a level where stockholders are happy to bank profits and speculators take out short positions, believing that a stock has run too far and could be due for a pullback.

That is what we’ve been witnessing so far this month with CAT.

Ultimately, if buyer conviction returns, the stock will break through resistance and test a higher level.

Breaking through short-term resistance is necessary if CAT’s longer-term rally is to remain intact.

That’s why I’m keeping a close eye on momentum. As I mentioned, the RSI has recently slipped lower.

If momentum continues to fall, it will become increasingly difficult for CAT to maintain its rally.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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