The best-performing Dow stock this year is about to fall, says one trader.
"I think Caterpillar is headed lower here," Andrew Keene of AlphaShark said Thursday on "Trading Nation." The stock has rallied more than 22 percent in 2016 amid a resurgence in commodities.
According to Keene, there's trouble brewing in the charts. On a daily chart of Caterpillar, he noted the stock is starting to make "lower lows, and lower highs," pointing to a level of resistance at $90.
"We will most likely get support here at the 100-day moving average, which is around $82.50; the next level of support is the 150-day moving average, which is around $79.50," he noted.
Keene sees Caterpillar headed to $80, or nearly 4 percent from current levels. Adding to his bear thesis, he mentioned unusual activity in the options market; an institutional buyer purchased 8,000 shares of Caterpillar December $80 puts for $1.30 per contract.
But rather than play for a straight drop, Keene used a hedge in case Caterpillar does take a leg higher in the next few weeks. Keene recommended selling the December 85/87.5 call spread for $1.00.
In this trade, Keene profits as long as Caterpillar stays below $86 by December expiration.
"I am risking $150 to make $100, but I can make money if the stock is flat, lower or goes up by less than $2.50," Keene said. "So I like this spread."
Trader takeaway: Andrew Keene is bearish on Caterpillar and is selling the December 85/87.5 call spread for $1.00 in order to play for a move down to $80 per share.
