Shares of virtualization technologies company VMware, Inc. (NYSE:VMW) as a result of their latest rally are higher by close to 40% thus far in 2017. While in my eye VMW stock does look overbought through the intermediate-term lens, in the near-term the trend remains our friend and could lead to yet another leg higher.
I often reiterate in this here daily column that trend following remains one of the most successful and time-tested trading and investing strategies of all time. However, trend following, like most other strategies, requires an understanding that proper risk management should be the primary concern, as well as respecting trends in multiple time frames.
As a side note, while I see another bullish trading setup in VMW stock, the overall stock market increasingly looks overbought in the near-term, which also coincides with the typical seasonal weakness we see in the month of October in stocks.
As such, if and when the broader market were to correct somewhat, it is unlikely that VMW stock would be completely immune to such a move.
VMW Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Starting off with the multiyear weekly chart, we see that VMW stock courtesy of its latest rally since August has now once again reached a long-standing horizontal line of technical resistance — around the $110 area. Considering that the stock has rallied 30% since June and in this time frame remains notably overbought I see little reason to add to medium to longer-term long positions in the stock at this juncture.
The stock is in need of consolidating the past few months’ rally, upon which (if and when) it could become a better buy again through these longer time frames.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that VMW stock in August had several up-gaps, showing the giddiness of investors to chase the stock higher in the near term. Over the past couple of weeks, however, the stock has begun to consolidate in a constructive manner, namely a ‘bull flag’ pattern that as the name indicates tends to resolve to the upside.
Traders and active investors could look to buy VMW stock upon a notable daily close out of this pattern and back above the $111 area, which then could target $115 and $117 respectively. Any bearish reversal, particularly if in conjunction with a broader stock market pullback, would be a clear stop loss signal in the near-term.
Check out Anthony Mirhaydari’s Daily Market Outlook for Sept. 29.
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