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Day one: our Caterpillar trade idea

Our potential strategy: buy Caterpillar at the open up to $87.50, with a stop loss at $81.50, and a potential profit target at $94.

The international machinery group will be in focus this week with its much-anticipated Q3 13 earnings report due out on October 23 at 22:30 AEDT. Caterpillar (CAT) is considered a bellwether for growth and investors will be keen to see if the global recovery is on track. The company is expected to issue FY14 revenue guidance which will help shape sentiment going forward. While the company is likely to flag macro uncertainty for a somewhat conservative approach, any form of guidance is likely to be well received. JP Morgan has an overweight rating on the stock with a $105 price target.

Improving fundamentals

There are a number of global macroeconomic factors which make me feel CAT is in for a positive run in the near term. Given the recent improvement in the resource space and stability in commodity prices, I feel CAT is well positioned once again. Recent reports from the major resource names like BHP and RIO have shown some very encouraging signs. Additionally, data out of China has turned a corner for the better after months of uncertainty.

Recent trade balance numbers showed a sharp jump in imports (+7.4%) which is positive for machinery suppliers like CAT. China’s Q3 GDP also indicated that growth momentum is picking up. Meanwhile, Europe is experiencing a slow improvement which should aid the macro uncertainty dissipating trade.

Price action

Looking at the price action on the stock, CAT has just broken through a downtrend resistance line which had held its price action back for just over a year. The line has been in place since March 2012 and was finally broken on Friday when the stock closed at 87.50. Positioning will be ramping up over the next few days as we approach the report, and we are looking to get set ahead of the event.

Potential trade idea

We are looking to buy CAT at the open which is likely to be in the 87.34 region, with a stop placed just under near-term support at 81.50. We will update our target for the trade once we are filled, but we are currently eyeing targets in the $94 region.  

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