CAT Follow Up

This is one of the trade set ups I can find for CAT around early January, at that time I was looking for a move above $95.50 with indicators falling apart (short in to price strength, 3C weakness). We had a previous position in CAT as well that did good.

My gut-feeling about CAT and earnings after having taken a closer look at the charts is that it was not going to be a surprise to anyone that heavy construction equipment (especially as it relates to China) was not going to do well. Wall Street is all about sentiment and expectations, if they've already priced in CAT's horrible performance, perhaps now it's at a price in which the valuation is attractive, it has a 2.4% dividend yield and as of my latest information a P/E of 10x so that's a relatively cheap stock and I think this was known in advance, CAT was discounted in advance, just look at the trend.

I think probabilities are that CAT bounces from here, there are several gaps that are obvious targets, however if you ask me if I think this is a quality trade, I would not take it. If I was short CAT since the January set up I'd be taking my profits, but I wouldn't want to run with CAT and then have the bottom fall out on some unassuming day, that's my take, yes I think it can make money from here, do I want to take the chance on it? No.

 Our first CAT short from Q1 2012 did very well.

 This is the area in the CAT "Trade Set-Tp" post linked above from January this year looking for a move above $95.50 which we saw to about $98

 This is the long term 4 hour negative divergence at that top, this is a VERY strong divergence, the visual divergence is just one aspect of the quality, the longer the timeframe, the stronger the divergence so this is a big one.

Right now it's still in line with price, maybe it hasn't caught up yet or maybe it just doesn't have a strong enough positive to support a really strong move, this is one of the reasons I'd fear a collapse in CAT during a rally on some random day.

 CAT 30 min negative at the Jan 2013 top looks much sharper than the chart above, but a 4 hour chart is much more meaningful than a 30 min chart, there is a decent positive divergence in place, thus I think the bad news in CAT was well known by the street and discounted pre-earnings.

 The 15 min chart positive too in a flat-ish base-like area, a little sloppy for my tastes, but it did just go through a knee-jerk earnings response.

 The 5 min chart with a clear negative at the April highs, not such a clear positive here, but it is there, the first gap in yellow just above should be an easy target, especially if the market is cooperative which I expect near term.

Here are several other gap areas and large volume at this morning's (capitulation ?) lows? For me the 7 points or maybe a bit more are just not worth the trouble, but if you are nimble, I think the surprise factor of CAT rallying after earnings like that could see some initial strong upside momentum.