CAT Short Trade

CAT and JOYG were in the Industry group "Farm Construction & Machinery" that  recently listed as one of the groups that has underperformed using some unorthodox metrics. In addition to that, CAT's chart is showing some serious problems as well.

 On the daily chart, this trendline actually extends back a bit, but the volatility in March-May has been a warning sign as this is typical top volatility. One thing you should always check when suspecting a top is how volume has behaved.

 To make volume analysis a little easier (you could use a moving average on volume as well) I created a simple custom cumulative volume indicator. A healthy stock should see volume rise on rallies and fall on declines, if you follow the white indicator with price, you'll see in the red boxes price rallied and volume declined, this is unhealthy. In the yellow boxes are the declines in price and you'll see volume shoot up, again, not  healthy volume. Don't overlook the importance of volume analysis, even in this low volume market environment.

 The longer 2-day 3C has shown pretty good confirmation, but we now have a negative divergence at the test of the highs. Also out Stoch/RSI combo indicator has gone negative, this is the first real RSI negative divergence during this trend. Typically we see tis at major tops.

 The 1 hour chart is a little confusing, but as usual, red arrows indicate distribution (negative divergences), white arrows indicate accumulation (positive divergences). One of the features of CAT that is so typical in the market now is that of the false breakout, you can see resistance at the red trendline and a false breakout at the blue arrow, 3C confirmed distribution into that breakout and CAT fell 17.5%  from there-the snowball effect.

 The 15 min chart shows a numeber of negative divergences and one positive divergence last week, in this case too CAT broke below a support level that was obvious at the blue arrows, thus again creating the false move/head fake that helped it move higher on a positive divergence or accumulation at the false breaks, and why accumulate there?

 Because there's supply. Look at the volume spikes as that support level was broken, it makes it a lot easier for Wall Street to accumulate when stops are being crushed. Again today another resistance level was taken out on the open and has since failed. This is just the way the game is played now.

And today's false breakout on a 1 min 3C chart? Distribution into the false breakout.

Cat may or may not have some upside from here, but it's looking like a good spot to start a short position on CAT.