Traders expect Caterpillar stock to pull back on China deal’s fraud

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.

By the way, we could look for better prospects in the stock market if trading CAT stock sounds risky, like Sneha Shah suggests at Seeking Alpha.

Disclaimer: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.