Buy the Dip on This Dow Stock

Caterpillar stock could be signaling its next leg higher

Managing Editor
Mar 21, 2019 at 2:52 PM
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Dow name Caterpillar Inc. (NYSE:CAT) has pulled back since touching a year-to-date high in late February. However, the blue chip is testing a key trendline on the charts, suggesting CAT stock could be on the verge of its next leg higher.

Caterpillar has added 0.7% this afternoon to trade at $133.86. From a longer-term perspective, the equity has been in a channel of higher lows and highs since its Oct. 29 bottom of $112.06. Now, CAT is back within one standard deviation of its 80-day moving average, following an extended stretch above this trendline. Per Schaeffer's Senior Quantitative Analyst Rocky White, there have been four similar retreats over the past three years, and Caterpillar shares were higher three weeks later by 8.02%, on average, and positive 100% of the time. From the blue chip's current stance, a similar push would place the shares at $144.59 -- a five-month peak.


Daily CAT with 80MA Since March 2018

Despite its recent pullback -- not to mention uncertainty about a U.S.-China trade deal -- the options market has been optimistic toward the machinery stock. This is per the equity's 50-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which stands at 1.95 -- and in the top 10% of its annual range. In other words, over the past 10 weeks, CAT calls have been purchased over puts at a faster-than-usual pace.

Analysts also remain bullishly biased. Of the 18 analysts covering CAT, 10 sport "buy" or better recommendations. However, the stock's average 12-month price target of $143.90 represents a premium of just 8% to its current price. Should Caterpillar once again bounce, a round of price-target hikes could ensue.

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