Caterpillar Inc (NYSE:CAT). stock surprised everyone, when it rose from 56.32 to 80.83 since January. After this 24-dollar recovery, investors are wondering how high could prices go and is it time to buy the stock. But one should never buy something just because its price is rising. Instead, we prefer using the Elliott Wave Principle to determine the best entry point. And at this stage, Caterpillar is not looking so healthy. The chart below explains why.
The Wave principle is a forecasting method, based on pattern recognition. In this case, the 4-hour chart of Caterpillar stock shows that the recent recovery took the shape of a five-wave impulse. In fact, as many as three degrees of trend could be found within the structure of the advance, marked as wave (I/A). According to the theory, this pattern should be followed by a three-wave decline. In addition, the relative strength index is showing a multiple bearish divergence since the top of wave (iii).
If this is the correct count, we could expect a significant pull-back in wave (II/B) from now on. It could provide much better buying levels than the current. So, traders and investors, who are willing to go long on Caterpillar stock, would be better off waiting for the price to drop by some 10 dollars a share, before pulling the trigger.