Shares of virtualization solutions software company VMware, Inc. (NYSE:VMW) rallied after its earnings report last week, and by so doing broke above an important medium-term technical resistance level. As a result, you now have well-defined levels around which you can build some long-side trades.
For its first quarter of 2015, VMware reported earnings of 86 cents per share of VMW stock, beating analyst estimates by 2 cents. Sales of $1.51 billion also beat expectations of $1.5 billion and were higher by 10% year-over-year. As far as outlook is concerned, VMW reiterated its previous guidance for 2015.
As a result, brokers including Barclays and Goldman Sachs reiterated positive comments on the VMW stock for the second quarter and second half of 2015.
VMW Stock Charts
Looking at the price action of VMW stock since its initial public offering back in 2007, we see that it has largely taken place in a wide but well-defined range since the summer of 2010.
To be clear, there have been and continue to be a plethora of trading opportunities within this bigger-picture trading range in the stock, but shareholders have not seen any price appreciation in the aggregate since the stock topped out in spring 2012. This is important for context as it means odds favor investors buying the dips and selling the rips, as opposed to buying breakout attempts above the highs, at least for the time being.
Note that when VMware stock most recently bottomed again in late January, it did so at the bottom of the multiyear trading range. If history is any guide purely based on this, VMW now stands a better chance at rallying back to the upper half of the trading range.
Looking at the daily chart of VMW stock, we see that its 200-day simple moving average (red line) has acted as a good reference point for the past couple of years. Let me also point out that not all stocks react well to the same moving averages, and furthermore, each stock has times when it reacts better or worse to certain moving averages.
Case in point: The 200-day MA of VMW stock was fairly useless from 2011 until early 2013 as a result of its choppy price action. However, this began to change by the summer of 2013 as VMware, Inc. showed better trending moves and better separation.
On the chart, we can see that after rallying above the 200-day MA in July 2013, VMW stock held above it until September of last year, when shares broke down hard and below. With the post-earnings rally last week, VMW stock broke above this moving average for the first time since last September, and if the moving average continues to show relevance, this break above it last week should be a bullish sign.
Furthermore, the price action since late last October has seen the stock trace out a solid-looking bottoming formation that could be looked at as an inverse head-and-shoulders pattern, which was triggered to the upside with last week’s rally.
Traders and investors should look to buy VMW stock on a push back above $91 for an initial move to the $97 level.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
