Caterpillar stock is among the top 10 stocks currently trending at StockTwits due to the alleged fraud the company uncovered last Friday at a Chinese mining equipment firm that it bought last year. The accounting fraud of the Chinese company that CAT management revealed and will lead to a write off most of the $653m deal (June 2012) of the ERA Mining Machinery Ltd. purchase, is the reason quite a few analysts and traders discussing over at StockTwits (how to use it as a stock screener) are expecting a pullback today.
Some investors are predicting a pullback that may bring CAT share price down to $80. No surprise as Caterpillar stock had found support twice at that level during 2012 before it gained 21% recently.
If the pullback does take place, CAT’s stock price will confirm a 2011 resistance level, forcing CAT stock to trade inside a channel between 80 and 97. On the other hand, the gaining candlestick that was printed 2 weeks ago with no shadows at the weekly stock chart is a good sign that buyers might not lose their strength due to the recent bad news. Additionally, the monthly chart also includes bullish indicators, most notably the 6 doji candlesticks coinciding with the resistance level previously confirmed in 2006, 2007 and 2008.
Even if the pullback’s prediction is proven correct, I strongly believe that Caterpillar share price won’t drop below $80 and will eventually resume the uptrend. As long as CAT stock is trading close to the support level at $80, I would be looking for bullish formations in the daily chart to buy some CAT shares, setting a profit target at the all-time high of $115. Besides, a general advice in stock trading suggests taking the opposite position of everyone else. So, during a likely pullback when everyone is selling, buying could be a profitable strategy; unless of course the support level is penetrated.