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EMC Rectangle - the Mesh Report

EMC Rectangle

Christian Tharp, CMT October 7, 2011 0

EMC Corporation develops, delivers and supports the information technology (IT) industry’s range of information infrastructure and virtual infrastructure technologies, solutions and services. EMC provides information storage, back-up and protection, management, security, information intelligence, data computing and virtualization technologies, services and solutions. EMC operates in two business categories: EMC Information Infrastructure and VMware Virtual Infrastructure. EMC Information Infrastructure provides a foundation for organizations to store, manage, protect, analyze and secure information and enhance their advantage within traditional data centers, virtual data centers and cloud-based IT infrastructures. VMware Virtual Infrastructure, which is represented by EMC’s interest in VMware, Inc. (VMware), is a provider of virtualization and cloud infrastructure software solutions.

To review EMC Corporation’s stock, please take a look at the 1-year chart of EMC (EMC Corporation) below with my added notations:

(Click here for full-sized image)

After breaking drastically lower in July, EMC has fallen into a sideways, consolidation pattern know as a Rectangle. This type of pattern forms when a stock gets stuck bouncing between a horizontal support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. The nice thing about a Rectangle pattern is that it will provide you trading points of support and resistance, as well as giving clearly defined breakout and breakdown points. For EMC, the Rectangle pattern formed a $23 resistance (red) and a $20 support (green).

Chart patterns can also provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown point to get the minimum price objective. For example, since the Rectangle pattern for EMC is $3 high ($23 – $20), EMC should climb to a minimum of $26 ($23 + $3) if it breaks above $23 or fall to $17 ($20 – $3) if the stock breaks below the $30 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.

 

The Tale of the Tape: EMC has formed a very common chart pattern know as a Rectangle. This pattern shows clear breakout and breakdown points for a potential long or short position. The possible long positions on EMC would be either on a pullback to $20, or on a breakout above $23. The short opportunities would be at either $23 or on a breakdown below $20. As always, regardless of entry, stop losses should be utilized.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

 

Good luck!

Christian Tharp, CMT



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