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Day four: our Caterpillar trade

The event our Caterpillar (CAT) trade was mainly centred around has come and gone and unfortunately the company failed to deliver.

We had been seeing some positive momentum heading into the report, with investors largely on the long side of Caterpillar. There was also a positive multi-year downtrend which was broken and suggested there was room for further near-term gains. However, the disappointing report saw the stock gap lower at the open. CAT missed on EPS ($1.45 versus $1.67 expected), revenue ($13.42 billion versus $14.47 billion anticipated) and also cut 2013 EPS forecasts ($6.50 to $5.50).

Construction and power were the main drivers of the shortfall, while mining showed some good signs. The fact that there is no buyback this year was also a bit of a downer for investors. Our entry on the stock was at $87.50 and the stock closed at $83.76 without having triggered the stop. The stop is around 7% from the entry and there are still some support levels in the way before we get to the stop. While the price action from last night is quite bearish, occasionally gaps are filled and there is a chance pivot lows from earlier this year will hold. As a result, we are looking to move the stop on the trade higher to $82.30, which effectively limits our risk to 6% as we give the bulls a chance to defend support in the $83 region. There is a chance we will see follow-through selling at the open before the price eventually stabilises.

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