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People have long used Caterpillar (CAT) to gauge the strength of the U.S. and global economies.
It’s the world’s largest mining, construction, and earthmoving manufacturer. So, of course, most view it as an old-style industrial blue-chip stock.
However, as the artificial intelligence (AI) theme has enveloped the market, CAT has been sucked into the AI vortex. Its turbine and power-generation business could be another way to tackle the infinite energy demands of the fast-growing AI sector.
Investors have bid its stock price higher as a variant of the AI theme. Recently, it’s been trading around double its April low.
But with it now trading like a Big Tech stock, investors need to be careful of it getting caught up in too much hype. That can make it vulnerable to a correction.
CAT is more exposed to any hiccups in the global economy than many of its tech peers… especially with tariffs and trade wars back in play…
The 50-day moving average (MA, blue line) in the chart of CAT below shows two distinct trends.
Up until April, CAT had been meandering lower. However, after bottoming out on April 7, CAT’s uptrend began, with it recently showing gains of 101%.
Check out the chart…
Caterpillar (CAT) – Weekly Chart
Source: e-Signal
CAT’s uptrend began with the Relative Strength Index (RSI) forming a ‘V’ and rallying from oversold territory (lower dashed line). A rising RSI indicates growing buyer momentum.
The rally was confirmed when the 10-day MA (red line) crossed over the 50-day MA, with both MAs tracking higher.
The other thing you’ll notice is how important the 50-day MA has been as a support level. CAT tested it multiple times throughout September (gray arrow). That support held, providing a base from which CAT could keep rallying.
Rallying off the 50-day MA level coincided with the RSI bullishly rallying from around the 50% level.
The recent AI-fueled surge has seen CAT gain a whopping 30% since the start of September. But it hasn’t all been one-way traffic – and you need to be extremely cautious.
So what should you look for around here?
After its initial strong run, CAT pulled back in August…
That coincided with a diverging pattern between the stock price and the RSI (left orange lines). Note that the RSI was tracking in overbought territory (lower left orange line).
Of course, the RSI can often continue to track in overbought territory when a stock is rallying strongly (just as it was here). So you can’t just blindly short a stock when the RSI is overbought – you need to wait for a trigger.
In this case, the RSI retraced from the 70% (overbought) level back toward the 50% level. That pulled CAT down.
Take another look:
Caterpillar (CAT) – Weekly Chart
Source: e-Signal
As you can see, a similar diverging pattern is developing now (right orange lines). And once again, we need to be patient – we can’t just enter a short position because the RSI is in overbought territory.
But if buying momentum starts falling, that will eventually pull the stock lower too. So we need to wait for the RSI to start retracing before considering shorting the stock or buying a put option. (Put options increase in value when the underlying stock falls.)
Recently, we’ve seen market darling and AI-leading stock Nvidia (NVDA) struggling to hold the $180 level, with buyers starting to lose conviction. If NVDA decisively breaks below that level, we can expect other AI-themed stocks to follow it down.
Throw in any further deterioration on the international trade front, and CAT could be particularly vulnerable to a pullback.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
