The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

28 January 2008

Ride My Seesaw

VMWare/VMW reports its quarterly results after the close of trading today. Having limned previously the fundamental story in favor of VMWare/VMW, and at length, now seems a propitious moment to share my thoughts re its chart...

A once clear, and bullish, setup has become turbid (chart below). Depending upon the investor's perspective, the pattern now could break in either direction; i.e., I could make an argument both bearish and bullish.

[click on all charts to enlarge]

Bearish: Something in the earnings report -- whether earnings and/or revenues prove insufficient, or the company provides conservative (read, bearish) guidance, etc; each unlikely -- could spook traders, who, already nervous by the markets' horrific decline, sell the stock. VMW thus could plummet (in one fell swoop?) to crucial support at ~$73-71. And possibly lower, which is the key reason a close beneath ~$71 represents my stop loss.

But there's the rub. Please recall that, if identified correctly, former resistance becomes support. The delineated trend line shown (chart above) likely is correct, and thus important and crucial. Which leads into the...

: A minor aspect of the setup for VMW is its positive divergence from what occurs in the general markets. I have discussed previously the topic of divergences, which offer a critical perspective on the markets seeming random nature.

The chart above is again VMW, but with an overlay of the NASDAQ Composite (ticker: COMPX). The COMPX and VMW each hit its respective high in late-October/early-November, and subsequently sold off to hit a concurrent low in late-November (point #1). Since then, the COMPX has roared to lower lows, whereas VMW has traded at marginally higher lows; thus, the positive (price) divergence. This divergence could be prefatory to ever more positive (bullish) price action, proving VMWare/VMW's role as a market leader. Or today's after hours earnings report could usher in a change in status to laggard from leader, and the shares swoon dramatically in a catch-up move to the general markets swoon.

IF the shares respond bullishly to the news from the company, upside breakout levels include:
1) $83 - important;
2) $85-87 - important;
3) ~$103 - crucial.

The breakout above $103 manifests as crucial because it proves and reifies the bottom; in fact, the potential double bottom.

Although comparatively brief -- and despite the fact I detest viewing opportunity through a single filter, especially one fraught with often erroneous perceptions as technical analysis -- I hope this post offers some guidance in advance of the likely wild and wooly, and directional, trading that will arrive after the close of (regular) trading today. (btw, you can read here, if interested, another analyst's perspective re VMW's earnings report and expectations.)

Full Disclosure: Long VMWare/VMW... but nervous.
-- David M Gordon / The Deipnosophist

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