By Dr. Alexander Elder and Kerry Lovvorn
Many of us are worried about the coming earnings season. There is a concern that the economy may be about to slip off into another recession or has already slid into it. Let's take a look at a stock that is likely to provide useful clues.
That stock is Caterpillar /zigman2/quotes/203434128/composite CAT +1.92% , and this CAT is on a slippery slope.
CAT has a decades-long pattern of topping out prior to the general market. It topped out prior to the recession of 2008/2009 and the financial crisis. It topped out prior to the mild recessions of 1994 and 1991. It also topped out prior to the tech bubble burst and the recession of 2001.
Why?
CAT is the world's biggest maker of construction and mining equipment, and it thrives in a robust economy. When the economy starts getting a cold, this CAT gets visibly sick, making it a good leading indicator.
Chart 1 Monthly (click here to enlarge chart)
This monthly chart shows the topping process that lead up to the 2007/2008 top and a recession that followed.
Near the right edge we can see that CAT has formed a double top and is testing its support levels between $80 and $85. This was the level of the highs during the 2007/2008 top. The topping pattern in 2007/2008 had a bearish divergence pattern in place as well as the current double top.
Chart 2 Weekly (click here to enlarge chart)
This weekly chart shows a resistance zone near the $100 level. A set of lower lows is identified by letters LL near the right edge.
CAT recently broke below the $100 zone and formed a lower low. Unless it recovers above $100, the probability is high that CAT will test its 2011 lows, indicating further weakness in the economy. If CAT cannot hold above its $80 to $85 support area, its downtrend will confirm overall market weakness and signal a further slowing in the economy.
Chart 3 Daily (click here to enlarge chart)
To avoid a bearish sign, the daily chart of CAT will need to change its trend from down to up and this will not occur unless CAT can move back above $90. If CAT continues to trade below $90, it'll confirm the downtrends in its weekly and daily timeframes.
This CAT is on a ledge and needs to find a solid footing soon; if it fails, it'll be a poor sign for the economy.
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