For today’s Trade of the Day, we will be looking at Caterpillar Inc. (CAT).
Before analyzing CAT’s chart, let’s take a closer look at the company and its services. Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide.
The company was founded in 1925 and is headquartered in Deerfield, Illinois.
The chart of CAT below is a weekly chart with an ADX indicator at the bottom. The description coming up next explains how to use the ADX.
Average Direction Index (ADX) – Strength Indicator
The Average Directional Index consists of 3 lines: Green, Red and Black.
- Green = +DI (Bullish)
- Red = -DI (Bearish)
- Black = ADX Strength Line
The DI line that is on top is in control. If the ADX line is heading up, strength is supporting the DI line that is on top and in control.
Each candle on the chart represents price movement over a 5-day (week) period; therefore, it takes weeks for trades to play out. When the -DI crosses over the +DI line, it gives a buy signal for Puts as the -DI line (red) appears as if it is in control and rising to head up on the ADX indicator, and as the ADX turns up that is even more bearish, suggesting a downward move is gaining strength. When the +DI (green line) crosses the red and the black line points up it shows an upward trend and Calls can be considered.
Let’s look at CAT’s weekly chart.
The ADX -DI (red line) has crossed the +DI and the black ADX line is curling up. As long as the -DI is above the +DI, price should fall. The past several weeks have been negative.
Potential CAT Trade
This signal could give a quick payout if it continues the downward move, and the strength of this pattern continues. I am typing this on Wednesday, and CAT costs about $173.41. If CAT’s price moves to $172 and the – DI (red line) is above the +DI, and the black line is heading up, you could consider a Put trade. The short-term price target for CAT is $160 and then, perhaps, lower.
Check Out How an Option Trade Could Pay Out Big Time
Option trading offers the potential of a lower initial investment and higher percentage gain. Let’s take a look and make a comparison.
To buy shares of CAT stock you would pay about $173.41 per share. You would not buy stock if you expect the price to go down. You would wait until it found a bottom before buying.
If you bought 1 Put option covering 100 shares of CAT with an August 19th expiration date for the 160 strike, the premium would be approximately $4.20 today, or $420 for 1 option. If price fell $12 over the next few weeks, the premium would likely increase $6, giving $600 profit on your $420 investment. This is a 43% gain.
Trading options is a win, win, win opportunity. Options often offer a smaller overall investment, covering more shares of stock and potential for greater profits.
I like to stress when trading options, you don’t need to wait for the expiration date to close the trade. You can close anywhere along the way prior to the expiration date. It is never a bad idea to take profit.
Trading options is like renting stocks for a fixed period of time. The potential to generate steady income with options is real, and it can be transforming.
Routinely remind yourself – I believe in myself and my ability to succeed. I believe in an abundance of unlimited possibilities. The future will be awesome!
I wish you the very best,
Past potential trade update:
Last week we discussed buying FCX Puts. On 7-11 the stock price hit the target entry of $27. You could have bought the Aug 19th 24 Put strike for $1.05. As of 7-13 the premium is $1.07. We will continue to monitor this trade.