Wednesday, March 13, 2013

VMware (VMW) surpasses $80 horizontal resistance

MAR13. 17:37EST. VMware (VMW) today offered a profitable trade setup to market participants that remembered the shares' late-January collapse on a poorly-received earnings report.

The setup in VMW was about as simple as they come: a break and (hourly candle) close above well-defined horizontal resistance.

VMW (VMware). Fri, Jan 25, 2013 to Wed, Mar 13, 2013. 1-hour candles.
On Tues, Jan 29, VMW gapped down from $98-and-change to under $80. The day's high tick was $80 even. Over the following fortnight, price consolidated horizontally, finding resistance on several occasions at approximately $79.6 -- this horizontal resistance is marked on the screenshot above by a solid blue line, with touches emphasized by yellow lines.

Today, VMW finally pierced $80 on the day's first hourly candle, with the move coming on high volume and with a positive news catalyst. On today's second hourly candle, price closed above $80 and subsequently rallied as high as $82.82.

To be sure, a trade hypothesis based primarily upon a break of horizontal resistance can be tricky. Such breaks sometimes fail, particularly when they occur on low volume and/or late in the trading day. Yet the VMW setup had several favorable characteristics: 1) the $79.6-$80 horizontal resistance level was very well-defined; it was initially established on a high volume gap down, and it was subsequently tested a few times; 2) price had consolidated for a few weeks; and 3) the breakout occurred on very high volume and early in the trading session.

Another advantage with breakout trades: a clear trade hypothesis (price must stay above the breakout, potentially allowing for short-lived "chop"), which by extension leads to clear stop-loss criteria.