Wednesday, 18 July 2018 14:00

Caterpillar bearish ‘death cross’ pattern ends longest bullish streak in decades

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Caterpillar Inc.’s stock chart has produced a “death cross” on Tuesday, to snap the longest bullish trend-following streak in at least 46 years, as the list of bearish technical patterns that have appeared in the last month just got a little longer.

The machinery maker’s stock CAT, +0.17%[1] rose 0.6% on Tuesday, erasing earlier losses of as much as 1.1%. However, the 50-day moving average declined to $147.78, to fall below the 200-day moving average, which ticked up to $147.88, according to FactSet. That ends a 566-session streak—since April 18, 2016—during which the 50-day moving average (MA) was above the 200-day moving average (MA).

The streak is the longest since at least April 1972, which is the earliest FactSet has data for the moving averages. The previous longest streak was 524 sessions, from July 24, 2009 to Aug. 19, 2011.

image FactSet, MarketWatch

Many technicians use the 50-day MA as a guide to the shorter-term trend, and view the 200-day MA as a dividing line between bullish and bearish longer-term trends. So when the 50-day MA crosses below the 200-day MA, they see the “death cross” as marking the spot that a shorter-term decline morphs into a longer-term downtrend.

Caterpillar’s death cross comes about three weeks after the stock entered a bear market, which many technicians define as a decline of at least 20% from a bull-market high. On June 25, the stock closed 20.1% below the Jan. 22, 2018 record close of $170.89. That marks the first bear market for the stock since March 3, 2016, when the stock closed 23.9% above the Jan. 25, 2016, 5 1/2-year low of $57.91.

As the stock entered a bear market, when it shed 2.4% on June 25 amid worries over the collateral damage from escalating trade tensions[2], it also broke through a previous strong support zone from about $138 to $140, which stopped previous breakdown attempts in their tracks.

image FactSet, MarketWatch

Technicians view breaks of previous key support levels, following significant highs, as a warning that bulls are no longer looking to add to their positions, and instead are looking to cash out. The stock’s inability to sustain bounces back above that support zone suggests sellers may be lining up.

The break of support also extended a pattern of lower lows and lower highs, which followers of the century-old Dow Theory of market analysis[3] believe is the definition of a downtrend. It’s similar to the way one can determine the direction of the tide by marking how far up the beach successive waves travel before petering out.

Also read: Don’t diss the Dow Theory just because it’s over...

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