I knew when I shorted CAT it wasn't going to zero, there's value in the company, it's one of the biggest Dow component stocks, but there was an opportunity to make some money and I'm a believer in taking what the market gives rather than forcing my expectations of what the market should give in a trade, things are way too dynamic.
This also means that I don't try to (as Jimmy Buffet would say), "Reason with Hurricane Season". There are people, institutions, hedge funds, insiders and those with inside information (yes it's illegal but it happens every day) that know more than I will ever know, so I want to watch the signals and the behavior of the asset and make my decisions based on hard data rather than what I think should happen.
CAT is a cyclical stock, I'd think that it's a safe short, but when I get signals that tell me something that doesn't fit with the trade, I don't argue with them. It all comes down to your edge and probabilities.
I'm happy for the CAT profit, a nice stable, easy trade that required almost no attention, but I don't fell like I would short CAT here so I have no reason to hold a short position in CAT here; maybe that changes in the future.
The charts...
This is around the area and price level CAT was shorted as a core short, non-leveraged. There's been a great trend in a very choppy market since so although the entry could have been better, the selection was a good choice which was based not on my feelings or thoughts, but signals.
This is an area that has caught my attention, a high volume move and a small Doji (almost hammer) daily candle, this has a short term bullish implication to it for increased probabilities of an upside reversal-remember though there's no target, it could be a day or a year.
Using my Trend Channel (my first proprietary indicator which I won an award for) which was inspired by the Turtle Trading Trending system, CAT gave a cover signal at the red arrow. This Channel tracks the individual characteristics of each stock it is applied to unlike an envelope channel or other channels that are dialed in to a particular setting. The Trend Channel tracks what is normal for the stock and then creates a channel around that invisible median of a formula that uses standard deviations away from "normal". When a short breaks above the lowest point of the top channel on a closing basis, something has changed; changes in character precede changes in trend. I was able to wait a bit with CAT and get out at a better price, but I don't like what I've seen.
The 60 min 3C chart gave several reasons to short CAT and at the time multiple other timeframes were used to confirm the trade, however again we have a positive divergence with many other stocks at the July lows, this didn't present a problem, the fact there's no serious negative divergence at the top in CAT did. The fact this chart has a leading positive component now is a problem for me.
The more detailed 30 min chart shows the July lows positive divergence which are fine, although a bit bigger than I'd expect to see, the lack of a strong negative divergence at the August highs again is a problem as is the current leading positive position of 3C.
The 15 min chart with more detail shows no negative divergence at the August highs and a leading positive now just like the 30 and 60 min, I always take these charts (15, 30 and 60 min) serious, especially when they confirm each other.
The 5 min chart confirms as well, 4 timeframes, not good probabilities for remaining short.
CAT also broke below support on increased volume, that means those shares are there for smart money to pick up on the cheap without arousing any suspicion as someone has to take the other side of the trade, in effect, it becomes a had fake, but bullish and allows accumulation which 3C seems to be telling us is happening.
Looking at a shorter term chart to confirm the last 2 days action (yesterday and today)...
The 1 min chart did exactly what I'd expect to see, it went from a relative positive divergence at support to a leading positive divergence below support as stops were hit and supply became plentiful at cheap prices. This may just be taking advantage of that supply, it may be something in the works for CAT we don't now about or it may be flat out wrong, but we have our edge and probabilities, I'm not arguing with either. I wouldn't short it here, thus I have no reason to hold the short here.
I will set alerts and keep an eye on CAT...
If CAT breaks above resistance (as it hasn't made a lower low), then longs will step in on a higher high and the break of the downtrend, I'll look at what happens then and if there is distribution in to that move, I may re-enter CAT short at better prices with probabilities back on my side.
For now, it's been a good trade and I'll leave it at that.
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