VMware, Inc.: These Charts Show Where VMW Stock Is Going Next

VMware, IncVMW Stock: A Bullish Reversal

This morning while conducting my stock scan, looking for actionable ideas, I came across the chart for VMware, Inc. (NYSE:VMW) stock. It contained a pattern I rarely see. I search through countless charts on a daily basis and I rarely—if ever—come across this pattern.

The pattern I found: an island bottom reversal.

An island bottom reversal is a pattern that consists of two gaps—an exhaustion gap (gap down) and a breakaway gap (gap up)—that occur at the same price level. The island is created as the price action between the gaps is isolated. In a bullish reversal formation, the pattern is significant because all the short sellers who initiated positions after the initial gap down are trapped. Put another way, as the pattern suggests, they become trapped and isolated on an “island.”

These short positions in VMW stock are now underwater and need to be covered. Losses amounting from shorting a stock are unlimited since there is no limit to how high VMW stock can trade. This creates a bullish tailwind.

VMware, Inc. NYSE Chart

Chart courtesy of www.StockCharts.com

If we look closer at just the highlighted island, we notice a pattern embedded within it. It is not uncommon for patterns to be imbedded within one another. In this case, the island contains a head and shoulders bottom pattern.

VMware, Inc. NYSE INDX

Chart courtesy of www.StockCharts.com

The head and shoulders bottom pattern consists of three troughs and a neckline, where the middle trough (the head) is the largest and the first and third troughs (the shoulders) are usually of equal size. The neckline is formed by connecting the reaction highs. The setup is confirmed when the price closes above the neckline, signaling that a reversal is at hand.

On July 14, VMW stock generated a golden cross on the chart. A golden cross is a bullish signal that is produced when a faster moving average, like the 50-day moving average, crosses above a slower moving average, such as the 200-day moving average. Traders use this signal to confirm a bull market is approaching. The golden cross confirms both bullish reversal patterns.

Breakaway gaps are rarely filled and they almost always signal that a new trend has begun. The breakaway gap confirming the head and shoulders pattern is extremely bullish.

Price Objectives for VMW Stock

The great thing about reversal patterns aside from signaling a change in trend is that they also provide us with price objectives.

The island bottom reversal projects a price objective of $92.00. This price objective is calculated by taking the depth of the island and adding it to the horizontal line created by the gaps.

The head and shoulders bottom pattern projects a price objective of $82.00. This price objective is calculated by adding the depth of the head to the neckline.

Both price objectives are above VMW stock’s current share price. The patterns are suggesting possible returns ranging from 13% to 27% from the current price of VMware shares. If using proper risk management techniques, both price objectives should serve as a good starting point for a good trading strategy.

Of course, as always, conducting your own due diligence before adopting an investment or trading strategy is key.

The Bottom Line on VMW Stock

It is not everyday that I come across a rare trend reversal pattern such as this. Plus, in the above example, multiple patterns are imbedded within each other. The multiple signals reinforce one another and help discern any doubt about the possible reversal pattern in VMW stock. This information can help a trader apply a strategy with conviction.