Bull Chart of the Day -- Reversal of Fortune for VMWare

NEW YORK (Real Money) -- There's a reversal of fortune in the market today after a few rough days. That pullback has given us an opportunity to identify stocks that held up well during the small downturn.

VMWare  (VMW) is one that popped up on several different bullish scans over the past few days and I can see why. After the strong push in April, VMWare has come back down to just about fill the gap it left; however, the stock never broke below the key $85 level. It has consolidated for six weeks in a similar pattern to what happened in March and April.

At that time, we can see a very loose "W" pattern. I know I'm asking for some leeway on the "W" since it isn't perfect, but we seldom see perfect patterns. Nothing is textbook -- more Picasso than Mavis Beacon on this chart. The last six weeks have seen a very similar pattern.

The resistance of the previous line happens to meet with the support of the current pattern. Note that this is a meeting at a single point as the lines have slightly different angles of degree. If the pattern repeats, then we should be looking at a target between $97 and $98 on a breakout above $90.50. Furthermore, our stop is a close under $88, so from a risk-reward standpoint, this is very attractive.

We have a past pattern to follow. Momentum, as measured by the Relative Strength Index (RSI) is very strong and has been for some time. The reward looks to measure about twice the level of the risk. Furthermore, if $88 does fail, there is more support around $85.50, which, even if we held until that point, would give us a risk equal to that of our potential reward. VMWare doesn't have the most liquid of options, but they are certainly playable.

My preference would simply be to use July $85 or $90 calls. The $90s will limit risk while the $85s limit theta. If you can psychologically get past the big premium on the $85 calls, that would be what I see as the way to go.

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