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Caterpillar, is it worth it\?

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On February 22nd, in the 03:00 EST update, I profiled shares of Caterpillar (NYSE:CAT) as bullish as the stock had just given a triple-top buy signal at $52 and felt this was a good stock for bulls to be trading bullish in.

Today, Credit Suisse raised their earnings per share estimates on Caterpillar (CAT) for fiscal 2002 to $3.00 from $2.75. While I was rather "upbeat" in the market monitor this morning, I'm now suggesting that traders look to lock in some gains as I'm not sure the near-term upside is all that attractive and Dow "risk" is currently high and indicated by the Dow Bullish % reading of 76% bullish. Here's what I'm looking at.

Caterpillar Chart - $1 box

The point/figure chart of Caterpillar (CAT) is very bullish, but I'm looking at a rather poor risk/reward scenario at current levels based on previous profile. In essence, the stock has gained roughly 11.5% (from $52 to $58) and near-term reward to my bullish resistance trend is about $3-$4, and risk of a pullback to the $52 level has me assessing a rather lackluster risk/reward scenario here. My question is "is there enough upside in CAT at current levels to keep buyers interested?"

This is a rather tough question for an investor, but a more easy question for a trader to answer. An investor is still remembering the longer-term bullish vertical count of $66 as their ultimate bullish target.

While that bullish target of $66 is still in play and will keep a longer-term bulls interest, it is not uncommon for stocks to pull back as they take a rest from a major run like shares of CAT have had in the previous couple of weeks.

Investors/traders that may have taken a full position on the break at $52, may want to part with 1/2 of their position at current levels ($58.61) and look for a potential pullback to re- establish a full position. Meanwhile, by still holding 1/2 of their position long from $52, they still have exposure to a very bullish Dow component that plays into the hands of an economic recovery.

As we assess "risk" in the Dow Industrials, the Dow Industrials Bullish Percent ($BPINDU) from stockcharts.com does a very good job in helping explain "Dow Risk" levels.

Dow Industrials Bullish % ($BPINDU) - 2% box

In early March (red 3) the Dow Industrials bullish % ($BPINDU) once again achieved the 70% level, which is considered "overbought." The above chart shows that this indicator has reached a level of 80% under extreme bullish conditions. While it can always go as high as 100%, all we take from this is that the current risk for a bull is considered at a "high level" currently.

We can see very good correlation of how the Dow bullish % chart has given traders/investors a "heads up" for potential weakness in Caterpillar (CAT) as correlated by the May-June (red 5-6) periods when the Dow Bullish Percent reversed lower from an "overbought" level, and then shares of Caterpillar (CAT) soon found weakness.

My "sell partial positions" call today is only based on current risk/reward in the Dow Industrials from a Caterpillar (CAT) bullish perspective. If CAT were to pull back to the lower $50 levels in the next couple of weeks, then I would certainly consider adding to a bullish position on the pullback.

If you're trading some "boring" stocks in the Dow Industrials like Caterpillar (CAT), use the bullish percent chart to help you understand that MARKET's risk. We do the same thing with the broader NASDAQ-100 Bullish % ($BPNDX) and S&P 500 Bullish % ($BPNDX) charts.

Constantly "test" your current holdings. Is there enough upside for the timeframe you're trading to keep other market participants interested in the stock given the "risk" characteristics that the bullish % charts are hinting at? The market giveth and it taketh away. I'm suggesting that bulls in CAT taketh some away today. Good trade!

Jeff Bailey
Senior Market Technician
Option Investor

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