VMW Stock: Calm Before the…
VMware, Inc. (NYSE:VMW) stock is ready to move, and the news surrounding this company has set the appropriate backdrop to feed this move.
VMware has just announced a partnership with Amazon.com, Inc. (NASDAQ:AMZN), as the number of companies wishing to capitalize on cloud computing continues to grow. This announcement comes on the heels of a hybrid cloud partnership between VMware and International Business Machines Corp. (NYSE:IBM).
It is not a secret that the cloud has been a growing segment of the economy. The recent earnings numbers from Microsoft Corporation (NASDAQ:MSFT) prove this premise.
There are tailwinds propelling this sector, and VMware stock is well positioned to capitalize on it. What I find most compelling about this company is the VMW stock price chart, and specifically the drop-off in volatility in recent months. When volatility drops off, such as it has with VMware stock, I use the analogy of “the calm before the storm” because volatility contracts into a tight range right before its expands.
I have been using price charts as the basis of my investment analysis for over a decade, and this type of analysis has been instrumental in setting up applicable investment strategies. The price charts have served me well, and the reason for my bullishness on VMW stock is presented below.
The following VMware stock chart illustrates the bullish trend that began in 2016.
Chart courtesy of StockCharts.com
There are two key indicators on the VMW stock chart above that stand out to confirm that the trend off of the company’s 2016 results is bullish, and remains so.
The first indicator is the ascending channel that is highlighted with two dotted parallel lines. This channel is not perfect, but it illustrates that the trend higher is uniform. The dotted lines that make up this pattern act as support and resistance. The price of VMware stock effectively oscillates between these levels as the trend continues to move in a bullish direction.
The second indicator is the golden cross. This indicator is used to confirm that a bull market is in play, and this indicator was generated in late June 2016, when the 50-day moving average, highlighted in blue, crossed above the 200-day moving average, highlighted in red.
The following VMware stock chart illustrates the contraction in volatility that has caught my attention.
Chart courtesy of StockCharts.com
In the chart above, VMW stock is trading within a range that continues to contract. This contraction is a result of a confinement of volatility as VMW stock is bound by two trend lines that make up this consolidation triangle.
This consolidation triangle is symmetrical, as both trend lines are converging towards each other. One line represents resistance and the other represents support. Traders refer to these triangles as a zone of indecision, as the prior price move is digested. These patterns are particularly explosive because, as the pattern progresses, momentum is gained and stored.
The thrust of the move is generated when one of these trend lines breaks and the momentum is released. Breakouts can be particularly spectacular, depending on the size and duration of the pattern.
On average, the scope of the breakout is similar to the move prior to the consolidation. Based on this premise, a $22.00 move in the VMware stock price, either up or down, is expected when this pattern breaks out. The direction of the breakout will determine the subsequent trend in VMW stock.
The bullish signals generated from the first chart can be used to speculate that the next move will be to the upside. This would create a potential price objective of $92.00, or the resistance level identified by the ascending channel.
The Bottom Line on VMware Stock
I am bullish on VMware stock, and the current contraction of volatility suggests that a major move in the stock is expected in the very near future. The overall chart paints a bullish picture, so I can only speculate that the next major move in VMW stock will be to the upside.