Deere vs. Caterpillar: Technical Street Fight

There are two names that often get lumped together by investors and although the fundamentals paint pictures of two very different companies, when making the choice between two heavy machinery companies, often, it comes down to these two well-known names.

Deere DE is a $33 billion company largely levered to the agriculture space. It has a forward P/E of 9.84 and a three percent short interest. Caterpillar CAT is a $56 billion company largely in the construction industry. It has a forward P/E of 10.82 and short interest of 4.5 percent.

But that’s as deep into the fundamentals as we’re going to go. This fight is all about the charts and if we’re looking at these two names from a purely technical standpoint, we’re not that concerned with the corn outlook or how much China has slowed down.

First, Deere. Deere is about eight percent off of its 52 week high of $95.04. The stock has established a strong level of support around the $82 area which it has held since September of 2012. Deere is a swing trader’s dream because of its ability to set up trading ranges that last for long periods of time.

Although this range isn’t as well-defined as those in the past, $82 to $92 has proven to be safe for constructing swing trading strategies. Looking at the chart in terms of these ranges, the recent weakness isn’t so alarming. The stock formed a double top earlier this month and since sold off, breaking through its 50 DMA but is testing the level today. A breakout on volume would be short-term bullish for the stock.

Caterpillar is 12 percent off of its 52 week high of $99.06 and like Deere, it’s beta of 1.89 makes it a great swing trading stock. But don’t expect the easy-to-spot trading ranges that Deere will hand you. This is a stock that went from $99.06 down to $79.49 over the course of two and a half months, and then rallied back to $90.69 only to fall to $85.77. Caterpillar has a knack for flushing out traders at all the wrong times making the risk/reward on this stock less compelling.

The chart shows a bearish head and shoulders pattern going back to September but some will argue that such a pattern dating back that far is a weak indicator which might be why the stock didn’t sell off severely when the right shoulder was formed.

In fact, it’s convincingly above its 50 day average and is within one dollar of its 200 day average.

Which stock looks like the better buy? Both have broken charts but each is showing bullish price action but the charts make Deere look a little better. Add this information to some fundamental analysis and that might produce a clear winner.

Disclosure: At the time of this writing, Tim Parker was long Deere and Caterpillar via options.