Caterpillar Shatters Support: Updating New Trading Levels

01/28/2015 7:00 am EST

Focus: STOCKS

Corey Rosenbloom

Founder and President, Afraid to Trade

Technician Corey Rosenbloom, of AfraidToTrade.com, illustrates how shares of this stock shattered support on an earnings miss Tuesday morning and thinks traders should now keep an eye out for a simple sell-signal but also be on the lookout for a vicious bear trap.

Caterpillar (CAT) shares shattered support at the $85.00 per share level on an earnings miss Tuesday morning.

Wall Street consensus estimated a gain of $1.55 per share, yet the actual reported earnings were $1.35 per share.

Traders subsequently punished the stock with a downside gap and break of a trendline and key support level.

Here’s the Daily Chart, though the Weekly Chart will give a broader perspective with targets:

chart
Click to Enlarge

Shares initially bounced (rallied) up off the $85.00 per share rising trendline level, only to see Tuesday morning’s earnings gap collapse price straight toward the $80.00 per share level.

Let’s actually turn our attention—and planning—to the Weekly Chart where we can see the broader picture:

chart
Click to Enlarge

I drew a simple Fibonacci Retracement grid from the 2009 low near $21.70 per share all the way to the $110.60 high into 2012.

Price has traded between the 38.2% retracement and the high ever since this high.

Notice the key support—highlighted—of the 38.20% level into $80.00 per share.

That’s our major focal point here; shares are bearish as a downside (sell) pathway opens under $80.00.

A simple sell-swing could take price back toward the midpoint or $70.00 per share confluence (target).

Otherwise, be on guard for a vicious Bear Trap, which could trigger on an instant return above $80.00.

We’re often charting—and thus trading—price as it moves toward or away from a key level.

For Caterpillar (CAT) shares, this level is simply $80.00 per share.

The next few swing or short-term trades should take place within this context, a movement (trap) up away from $80 or else a breakdown/shatter sell signal under $80.

By Corey Rosenbloom, CMT, Trader and Blogger, AfraidToTrade.com

Related Articles on STOCKS