2 Buy Signals for This Blue Chip

CAT options traders are hoping for a short-term bounce, too

by Karee Venema

Published on Apr 9, 2018 at 11:35 AM

After a strong start to 2018, shares of Caterpillar Inc. (NYSE:CAT) quickly retreated from their Jan. 16 record high of $173.24 amid the broader stock market correction. The construction stock plunged 5% in February, and an additional 4.7% in March -- the latter drop sparked by rising fears of a U.S.-China trade war. CAT continued to sell off into April, but is now trading near two historically bullish trendlines, suggesting a big bounce could be on the horizon for the Dow stock.

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, CAT is now trading within one standard deviation of both its 160-day and 200-day moving averages, following lengthy stays above each trendline. In the five other times this signal has flashed for the 160-day moving average in the past three years, Caterpillar shares have averaged a 21-day gain of 12.5%, and have been positive one month later 100% of the time. The stock has also turned in a positive return each time the 200-day signal has flashed over this time frame, averaging a gain of 11.26%. Today, CAT stock is up 2.3% at $146.20.

cat stock chart april 9

Another rally could have analysts re-evaluating their skeptical ratings, which could help fuel a potential surge. Of the 20 analysts covering Caterpillar stock, half maintain a "hold" recommendation.

Also potentially working in the stock's favor is Caterpillar's upcoming earnings report, scheduled for the morning of Tuesday, April 24. The equity has closed higher in the session after the company released its quarterly results in each of the past four quarters, averaging a gain of 4.85%.

Options traders, meanwhile, are hoping the stock has hit a near-term bottom. The April 140 put is home to peak open interest of 14,472 contracts, and data from Trade-Alert points to mostly sell-to-open activity here -- the bulk of which occurred in late March when CAT was trading near $152. If this is the case, these put writers are betting on Caterpillar shares to hold above $140 through expiration at the close on Friday, April 20.


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