VMware, Inc.: VMW Stock Chart Suggests Price Surge Is Brewing
VMW Stock: Setting Up
VMware, Inc. (NYSE:VMW) stock originally piqued my interest when I noticed a large rare pattern on the price chart. At first glance, this pattern was not obvious to me, so I have no doubt that others would have probably missed this pattern when they crossed paths with the VMW stock chart.
For those not familiar with my work, I use technical analysis as my framework to analyse and form opinions on prospective investments. Technical analysis is the study of price and chart patterns, in which historical data is used to forecast future direction and price movements. There are theories that debunk this style of analysis, but modern breakthroughs in behavioral finance have once again opened the door and support many segments of technical analysis.
I have used this technique, having applied it successfully in my trading strategies for over a decade. The key to my strategy is to set my objective prior to entering a trade. This will keep my emotions at bay and my level of risk defined.
The pattern that first interested me in VMware stock is illustrated below.
Chart courtesy of StockCharts.com
The large and rare pattern on the chart above is known to traders and analysts as an island bottom reversal. This pattern 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 in between the gaps is isolated.
In a bullish reversal formation, the pattern is significant because all of the short sellers who initiated positions after the initial gap down are trapped or, as the pattern suggests, trapped and isolated on an island.
These short positions in VMW stock are now all underwater, and need to be covered at some point. Losses amounting from shorting a stock are unlimited, as there is no limit to how high VMW stock can trade. This pattern is effective in creating a bullish tailwind that can propel VMware stock higher.
The following VMW stock chart illustrates the positive developments that support my bullish premise.
Chart courtesy of StockCharts.com
In June 2016, VMware stock generated a golden cross. A golden cross is a bullish signal that is produced when a 50-day moving average, highlighted in blue, crosses above a 200-day moving average, highlighted in red. Traders use this signal to confirm that a bull market is on the horizon and this signal has effectively confirmed that the island bottom was indeed a trend reversal pattern.
Following the trend reversal, the price has traded orderly, within an ascending channel. This pattern is defined by two identical parallel lines. VMware stock will oscillate between these two lines for as long as the trend permits. I could use this pattern as a guide if I were to employ a swing trading strategy.
The following VMW stock chart illustrates the pattern that has developed over the last month.
Chart courtesy of StockCharts.com
The chart pattern I am referring to is a symmetrical triangle. A symmetrical triangle, by definition, is a consolidation pattern that contains two converging trend lines. One line represents resistance and the other represents support. Traders refer to triangles as a zone of indecision, as the prior move is digested. These patterns are particularly explosive because, as the pattern progresses, momentum gathers speed similar to a spiral pattern.
The thrust of the move is generated by bulls and bears fighting for a foothold. They are essentially building positions for their respective camps and, as the trend progresses and the lines that separate them grow thinner, it is only a matter of time before one camp prevails and a breakout occurs.
The Bottom Line on VMware stock
I am bullish on VMware stock and I am patiently awaiting the short-term pattern to dictate its next move. As long as VMW stock is trading above the gaps that defined the island reversal pattern, my bias will remain bullish.
