Making A Bet, Or Is It A Sure Thing?

10/15/07 01:07:06 PM

by Koos van der Merwe

As a technician, I try not to let fundamentals influence me simply because I am in a hurry.

Security: VMW
Position: Buy

Technical analysis looks at patterns and reliable indicators to determine the movement of a stock. Fundamental analysis looks at the financial results of good management and then attempts to project the future financial performance of the companies they have studied. Short term for a fundamentalist is measured in years, while for a technical analyst, it could be hours.

One stock that has had a recent initial public offering is VMWare (VMW). What attracted me to it was the statement made by CNBC's Jim Cramer when he was asked what he thought about the company. "Not much to say, " he replied. "It could be another Google. Buy it and hold it."

The stock hit the market on August 14 at $51.65. It closed at $102.98 on Friday, October 12, after hitting a high of $115.71 on Thursday, October 11.

FIGURE 1: VMWARE INC. Is this stock a sure thing or is it a gamble?

Graphic provided by: AdvancedGET.

So what technical indicators can you use to forecast the stock's movement? My favorite in cases where data is so limited are as follows:

1. A three-period relative strength index (RSI) indicator, which gave a buy signal on September 5, another on September 17, after a sell signal on September 14. This sell was not confirmed by a fall below the lower moving average band shown on Figure 1.
2. The inside moving average band. This band is a 15-period simple moving average offset by 2% on either side. A move below the lower band suggests a sell signal.
3. Elliott wave count. The wave count shown suggests that the stock could be in a wave 4th retracement. The chart suggests a 36% probability of wave 4 down being completed as forecast, with an upside target of $131.47.
4. The volume is above the average, the redline rising as the price rises, a sign of strength, and falling as the price falls, also a sign of strength.
5. Finally, as long as the price remains above the trendline and as long as the Dow Jones Industrial Average (DJIA) remains positive, this is a share worth buying and, according to Cramer, holding.

To conclude. I do not like buying a stock that has no history. Past performance is the basis of technical analysis, but VMWare Inc. is an exception.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Making A Bet, Or Is It A Sure Thing?

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