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In this article I will continue my analysis of Caterpillar (NYSE:CAT), the US stock that is turning into a butterfly as far as trading opportunities go. When we last discussed this stock in 50% of the Big Moves, we had seen a 2-day ABC short setup acting as the first lower swing top entry and were watching for a retracement to provide further shorting opportunities.
The market action since then has provided coinciding daily and weekly setups that gave a very predictable result. The run up into mid-April produced a minor double top setup on the daily chart but the daily swing chart showed a higher swing top. As these tops were around 50% of the run down to that point, we might then have looked for a 2-day or 3-day ABC setup to trade these double tops. See Chart 1:
Chart 1: CAT daily bar chart showing minor double tops
click chart to enlarge
No such setup eventuated, so how could we trade this? Should we trade this double top? The answer lies in the bigger picture. (If you are not used to looking at the weekly and monthly charts, now is the time to start). The bigger picture illustrates the bigger moves and when we turn to the weekly bar and swing charts in Chart 2, we can see that a weekly ABC short has appeared with point C on the second of our minor double tops.
Chart 2: CAT Weekly Bar Chart with Weekly ABC Short
click chart to enlarge
What is also exciting is that 200% of the double tops clusters with 150% of the weekly ABC short and the previous lows in November and December. This gives us a profit target to aim for.
The trade was filled on Monday of the following week and our profit target was reached on 17 May. Stops for this weekly trade could have been managed using the weekly or daily milestones or perhaps trailing behind 1-day swings, or a combination of milestones and trailing swings.
Chart 3: CAT Weekly Swing Chart
click chart to enlarge
There is presently a 1-day ABC short that has been filled and the market is sitting below the November and December lows. Having made profits all the way down to here, we could take that short but I am not convinced that it will be profitable. Turning to the weekly swing chart in Chart 3, we see expanding down swings since the February top, but the current down swing is looking like a repeat of the First Range Out and a potential failure at 50% of the last down swing.
A rally on the weekly chart at this point will complete four sections down from the top, though we are not yet at 75% of the run down from the bigger picture double top that had us shorting this market in the first place.
Chart 4: Weekly Bar Chart with Double Top Milestones
click chart to enlarge
Time will tell how this latest setup plays out and if it stays below the November and December lows, CAT is looking weak. CAT might take some time to give us another setup but with a terrific run so far, this is one stock I will continue to watch.
It’s the Journey
Lauren Jones
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