When it comes to what people say versus what the market says, I think it is wisest to listen to the market. Just look at mining machinery maker Caterpillar (NYSE: CAT), which fell almost 1% in premarket trading on Tuesday after the company beat second-quarter earnings estimates but reported declines in profit and revenue. To top things off, the company offered one of the gloomiest year-end outlooks of the earnings season.
Tell that to the market, though. That very day, after a weak premarket, the stock closed higher to the tune of 5%. Not only that, it scored a technical breakout, which we will get to momentarily.
The company stated that global uncertainty, including the Brexit and the turmoil in Turkey, have increased risks. I'm not a fundamental analyst, but it seems to me that sort of news would boost the mining of precious metals, and indirectly, the use of Caterpillar's equipment. Indeed, the gold market has been on the rise all year.
But let's stick to the charts. As we can see, Caterpillar broke out last week to the upside. Volume was rather heavy, too, validating the change in tone for the stock. And it is likely no coincidence that CAT has spent the past six months rallying right behind gold.
In technical analysis, good market action on bad news is bullish. Media outlets focused on the weak outlook, but the stock shrugged off those concerns and rose for the day. Apparently, the news wasn't as bad as whatever traders had feared. Call it a relief rally if you wish, but a basement-dwelling, chartist with no access to the media would only see the price action and the move above resistance.
Since peaking in April, the stock also traced out a cup-ans-handle pattern. This is a specific form of a trading range with a pause just under the upper border. The basic premise is that a rallying stock pulls back in a gradual, low-excitement way and heads back up in an equally not-newsworthy way. That movement forms the cup shape.
The pause under resistance forms the handle of the cup, but there is nothing magical about it. We see pauses at the tops of all sorts of patterns all the time, and they all represent a last moment of hesitation before the breakout. When that move finally happens, it truly represents a change of mood. What was expensive (resistance) is now thought to be cheap. That Caterpillar's volume soared as it broke resistance only confirms the widespread change in tone for the better.
Further confirming the new rising trend, price action has finally separated CAT from its major moving averages. That means the stock traded safely above the averages without dipping back below for quite some time. The 50-day average is already moving higher, and the more important 200-day average now shows a clear inflection from down to up.
Even more evidence comes from commonly used technical indicators. On-balance volume, which keeps a running total of volume on up days minus down days, is rising. The Relative Strength Index (RSI), tells us that momentum is solid without waning or being overbought.
Relative performance, also known as relative strength, set a higher high than it did in April. This is important because it tells us that Caterpillar, the market's former bug to be squashed, has been outperforming the S&P 500 all year. Think about that before you get caught up in a weak outlook and poor earnings.
So, just how high can CAT climb? The $90 level is the next important resistance level, and that would be a nice 9% gain from current levels without much in its way. That would also be a logical place for another pause on its way to a long-term gain and possible move back into triple digits. But let's not get ahead of ourselves. We'll set a reasonable target on this more staid type of stock. We're not talking about Facebook (Nasaq: FB) here.
The market is more trustworthy than an analyst and even more trustworthy than a CEO talking down his stock in order to beat earnings forecasts on the next go-around. Conspiracy theory? Maybe. But the market still rules. Caterpillar has a good chart, plenty of doubters and lots of "charted" territory above, unlike some stocks forging ahead into nosebleed levels. That makes it a great trade for the coming weeks.
Recommended Trade Setup:
-- Buy CAT at the market price
-- Set stop-loss at $79.50
-- Set initial price target at $90 for a potential 9% gain in six weeks
Note: If you have six minutes, a millionaire trading prodigy can show you how to turn a 9% move in CAT into double- or even triple-digit profits over the next few months. In the past, he's turned:
-- A 7% move in Apple (Nasdaq: AAPL) into a 63% gain
-- An 8% move in Aetna (NYSE: AET) into a 70% gain
-- A 5% move in Level 3 Communications (NYSE: LVLT) into a 100% gain
-- And hundreds more just like it
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This article originally appeared on ProfitableTrading.com: This Blue Chip's Chart Trumps All The Doom-And-Gloomers