CAT / DE Follow Up

I don't recall why I chose DE over CAT, but I did have both at one time and obviously that is too much exposure to one sub-industry group.

I'll show you the basics of CAT, we can always follow up on any opportunities that may arise, but you should get a feel for how big this trade is and we'll look more specifically at DE, which was entered so long ago, I don't recall (within the last 5 months would be my best guess), the position is at a profit as a short.

I have a little room to add to DE, but not much. I'll show you the set up that I'd be looking for, but if you are a long term trader, a trend trader and you aren't bothered by intraday movement or day to day, I think either one of these, great set up entry or not, are in a position that make them very attractive short positions.

CAT

 This CAT weekly chart demonstrates several concepts that I have recently discussed as recently as today, specifically the change in upside trend to a more parabolic (more straight up move) which seems bullish, but is almost always the first red flag in a trend that is about to end.

"A" we have a normal, nice trend, if it kept going like this, I'd stay long. It's hard to see, but at "B", note the trendline goes nearly vertical, that is the last run and then CAT enters a choppy top and declines. The easy money in a trending trade is at "A", at "B" you want to tighten stops up and start thinking about taking partial profits. "C" is the top-unlike the textbook, a real life H&S can look very different, you must confirm the pattern with volume analysis. At "D" as I often say, "Fear is stronger than greed", nearly 5 years of gains are wiped out in 6 months. At "E" we have another bottom pattern you won't see like this in a textbook, it is an  Inverse H&S bottom at the 2009 lows for the market, note the slanting trendline-Again these are even more important to confirm with volume analysis of the price pattern. At "F" we have the trend that is normal and the start of stage 2 mark up, but at "G" we have another increased momentum move that leads to a top, these are unpredictable as you never know when they will stop and possibly do some quick damage. "H" is a large triangle top (remember this is a 5-day chart)-no triangles this big are consolidation patterns, they are either tops or bottoms depending on the trends that precede them, in this case a top.

Always look for a head fake move (it could be a Crazy Ivan with a downside break followed by another head fake upside breakout of the triangle). That head fake move top the upside is almost ALWAYS going to fail. 3C is excellent for helping to confirm the head fake, but that is your lowest risk, best price, highest probability entry.

Now you know what to watch for in CAT.

 Looking at the same chart from the 4 stages of almost every asset's life-cycle (whether it be a bounce, a counter trend rally, a swing trade or a Primary trend-typically you'll see these 4 stages).

Stage 1 is the base/accumulation-this is where smart money buys, not when the stock is moving up, when it is boring and hated and no one is paying attention. Stage 2 is "Mark-Up", this is where the easy trending money is made. Stage "3" is distribution/top and Stage 4 is Decline, then it all starts over again with stage 1.

Remember how I say a stock needs time to make a reversal, it's a process, not an event, in this context that process is stage 1 for an upside reversal and stage 3 for a downside reversal.

Money Stream 5-day clearly shows the distribution in CAT as the world economy has been easy to predict, CAT has been under distribution after the mark-up period.

DE

 DE has a similar Triangle top on a 5-day chart, it did breakout to the upside, making a head fake move.

Here's a daily chart showing the head-fake breakout of the triangle-the size of a Head Fake Move IS ALMOST ALWAYS PROPORTIONATE TO THE TREND IT IS REVERSING.


As the downtrend of lower highs/lower lows develops, there's another head fake move out of that channel to shakeout shorts, another great entry place. Click on the chart to enlarge, in yellow you'll notice two gaps, I'd like to add to DE at one of them, at least the first / lower gap.

 The weekly Money Stream chart for DE is similar to CAT's, note how the head fake breakout is used to distribute heavily-this can be selling of long positions or short selling in to price strength.

Here's a closer look showing distribution as soon as the triangle breaks out, there's not much inside the triangle because they don't want to destroy the probabilities of the breakout. This concept should be remembered in our own recent triangles of Thursday (failed) and Friday which you can see what's happened thus far today. 

 Daily 3C chart showing the same-heavy distribution on the breakout to higher prices.

The 60 min chart shows the downtrend after the failed breakout and a head fake move out of the channel, note it too is under heavy distribution, these are excellent entry points as price is better, risk is lower and with confirmed head fakes, probabilities are higher.

 15 min chart confirms as well

 5 min chart is even weak and confirming price action to the downside.

However the intraday charts suggest a chance at least of a move to fill the gaps with some small probative divergences, the gap is to the right at the yellow box.

3 min positive and the higher gap in yellow-both areas should have alerts set for possible entry/add to short equity positions.

Although these are not the high beta stocks I prefer, they certainly have the set up for the trending positions I prefer and with the multiples jacked up by a lot of liquidity, they stand to lose a lot of ground as that liquidity is mopped up.