With swing trading, you may often find a final sell on weakness will immediately be followed by a new setup for an entry. That was the case for CAT stock when it came back the very next day.
Swing Trading Example Revisited: Caterpillar Stock
In a previous column, we covered a trade in Caterpillar (CAT) on SwingTrader. By taking profits into strength, we ended up with a 6.5% gain. The early profit taking allowed us to give CAT stock more room before our final exit (1).
It was a tough call. Sure, CAT stock had a decisive close below both the 5- and 10-day moving average lines on March 4. And the stock market weakened as the S&P 500 joined the Nasdaq composite below its 50-day moving average line. But Caterpillar stock got support at its 21-day moving average line and its relative strength line showed power.
The CAT Stock Came Back The Very Next Day
It was hard to ignore the power in Caterpillar the next day and it got added right back to SwingTrader (2). The S&P 500 and Dow Jones Industrial Average outperformed for the day as many cyclicals continued to look promising. Certainly over the former tech winners. But CAT stock didn’t go straight up. There was a test early on where it closed below our entry and both the 5- and 10-day moving averages (3). What did we do? We held. It was only retracing a portion of the strength shown on the entry day.
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From there, the move continued and we took profits on March 12 as the stock surpassed recent highs (4). Caterpillar stock continued moving up the rest of the day and we were up over 4% from our entry by the close. One could even debate taking the profit that early as it looked like a place where a position could be initiated.
After another test of the 5-day line (5), CAT stock had another strong rebound and we took another third off to lock in some more profits (6).
Downside Reversals Suggest Short-term Weakness
On March 18, CAT stock showed a classic topping sign (7), a downside reversal. You’ll see a stock push to new highs and then fall and close down for the day near its lows. Often, short-term weakness follows. At times, it can signal the ultimate top. The Dow Jones Industrial Average showed similar action.
Because we had already locked in most of our profit, we gave this one room. CAT stock was one of our stronger stocks. However, we ended up exiting the next day as the weakness continued (8). A factor in the sell decision was that Caterpillar stock took out the March 16 lows where it previously found support at the 5-day line (5).
Had we waited for a decisive close below the 10-day line, we would have given up a lot more profit (9). The downside reversal and subsequent action led to the earlier sell.
But don’t let CAT stock drop off your radar. It’s now setting up in a potential ascending base and is again finding support at the 21-day line. CAT stock could end up coming back on another day.
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