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Caterpillar's next rally depends on this one level, trader says

These investing pros make the case for Deere and Caterpillar
These investing pros make the case for Deere and Caterpillar

Dow stock Caterpillar has been shut out of the market rally this year.

While the Dow Jones Industrial Average has gained 17% in 2019, Caterpillar has risen just 4%. The industrial giant has been punished by escalating U.S.-China trade tensions and fears of a slowing global economy.

But, JC O'Hara, chief market technician at MKM Partners, said this consolidation is natural after such a strong performance in recent years.

"If we go back to 2016, many investors are forgetting that Caterpillar doubled to the 2018 highs, and often when stocks have that sort of move, there's time needed to digest those moves, and that's precisely what we believe happened in 2018 and for the better part of this year," O'Hara said Thursday on CNBC's "Trading Nation." 

From the beginning of 2016 to a record high in January 2018, Caterpillar shares raced up 208%. Now the stock just needs to clear one key level before it takes off again, O'Hara said.

"Shorter term, Caterpillar has stirred up some demand around that $110 support level, and now it's inching closer to upper overhead resistance. I really think if it breaks above $140, the next 10% will be higher to our $160 technical price target," said O'Hara.

To get to its resistance at $140, the shares would need to add 6%. A move to $160 implies 21% upside from current levels.

Caterpillar and fellow trade-sensitive stock Deere declined Thursday after Wells Fargo downgraded both to market perform. Analysts said they expect weaker U.S. demand for construction and farm equipment next year.

Erin Gibbs of Gibbs Wealth Management disagrees with Wells Fargo's call on Deere.

"Deere actually fundamentally isn't bad at all. We're looking at about 12% growth for next year, which is ahead of the overall market expectations. There's a lot of positive sentiment ever since the new CEO was announced back at the end of August, and they're just implementing a lot of new cost-cutting technology," Gibbs said Thursday on "Trading Nation." 

Gibbs also said that Deere has the advantage over Caterpillar in the U.S.-China trade war.

"Out of the two, though they both have a lot of exposure to the China trade on the supply side, Deere is a safer bet, and we're going to have some good things going for it over the next 12 months," said Gibbs.

Deere has added 5% this month, while Caterpillar has surged 11%. Both are lower for the quarter.