Bearish pundits are scratching their heads and pulling their hair as the bull train continues full steam ahead on Wall Street even after last week’s choppy sell-off. Major equity indexes at home and in the European currency bloc marched to fresh multi-year highs on Tuesday; eager buyers are shrugging off looming threats including the sequester drama in Washington D.C. that may very well inspire a steeper correction as the end of March approaches [for more market news and analysis subscribe to our free newsletter].
Amid the buying euphoria on the equity front, those eager to get a piece of the action may be hesitant to jump in long given the stellar run-ups seen thus far on the year. Luckily, the investment landscape is far reaching and not every security is trading near all-time highs. Construction and mining equipment bellwether Caterpillar (CAT) offers a compelling opportunity at the moment, which warrants a closer look from anyone looking to establish tangential exposure to the global metals and mining market.
CAT popped above its 200-day moving average (yellow line) at start of 2013 after failing to summit this level during the second half of last year. Despite its bullish start to the year, CAT traded lower for almost the entire month of February; however, this decline appears to be a healthy correction as the stock has managed to hold above the $90 level and appears to be gearing up for a rebound off its 200-day moving average.
More importantly take note of CAT’s trading channel, which the stock has oscillated within since bottoming out in July of 2012. With CAT trading near the bottom support line of its channel, entering into a long position at current levels is appealing for two reasons. First and foremost, traders can closely manage their downside risk by setting a stop-loss right below the recent low or underneath the 200-day SMA, depending on their risk preferences. Second, this trade offers attractive upside potential judging by the upper resistance line of the channel, which comes in around the $100 mark [see 5 Commodity Trading Mistakes You Could Be Making].
If buying euphoria returns to the commodity producers segment of the equity market, CAT should follow higher as this company supplies some of the world’s biggest resource miners. In terms of upside, CAT may face selling pressures as it nears its previous resistance level around $100 a share. On the other hand, if a broad correction sweeps over Wall Street, this stock may break below its trading channel; in terms of downside, CAT has major support at $80 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
Disclosure: No positions at time of writing.