VMWARE has become traders' favorite momentum name over the past twelve months or so, and for good reason – even if few understand what 'cloud computing' really is. The stock bottomed in late 2008 near $17 and reached a new 52 week high yesterday at $102.74. In 2011 so far the stock displayed great volatility with gaps up and down providing good opportunity for the quick and nimble trader and continuing hope for the buy and hold trend folks.
While the stock already flashed several topping warning signals this year, yesterday's price action to me speaks the loudest. Note the resistance area around $97-$99 (blue line). Yesterday the stock tried to break above that key area but failed miserably, not only leaving an ugly long-tailed candlestick behind but also closing well below the resistance area. There are many ways of looking at this chart now, but few of them are positive…at least in the near-term. The strong intraday selloff yesterday after reaching a new 52 week high was indicative of a blow-off top and a complete lack of buyers at those elevated levels.
Let me be clear, it is a dangerous game betting against rally leading stocks like VMW. However, I specialize in identifying high-probability trading setups and to me the long bearish candle that VMW displayed yesterday at a new 52 week high qualifies as such.
What we are considering as a trade here is look to the short side with a stop-loss clearly placed at yesterday's high. Remember, there were no more buyers at those elevated levels, so a serious change in short-term sentiment would be needed for investors to start buying this stock past yesterday's high. This trade could also be done by selling/writing far out of the money call options (at least three months in the future) VMW. Premiums are still juicy and the implied volatility has increased over recent days.