S&P 500, THE TOP?

Is this a head and Shoulders top forming? There is a clear left shoulder and a head and now we might be working on the right shoulder formation. Volume was exceptionally strong on the way down from the top of the head which implies distribution while it has been anemic during the rally the past 4 days. It will be interesting to see the volume tomorrow with another up day after the announced BOA investment in CFC. I suspect tomorrow will be the last expansion day of this rally with sideways action the next few days just so the oversold condition can be worked off. I figure out another week to two weeks of sideways action and then it can start trading water again as we enter into September. September and October are seasonally the weakest months of the year. Although those two months have not lived up to their reputation the past 2 years, considering the set up on the S&P 500 I suspect they will this year. Anyway, I am not convinced of this rally and I think that at least a retest of the low is coming. If that low breaks then we will have a completed head and shoulders top with another 180 points to go on the downside which would put this index into a bear market.

EMC, a way to play VMWare.

VMWare, considered the hottest ipo of the year to many on Wall street comes out in public this Tuesday. Emc the company who owns Wmware has already raised the offering price from $23-$25 to $27-$29. A few facts about Wmware are in this link.http://biz.yahoo.com/ap/070810/vmware_ipo_spotlight.html?.v=2



What I could gather from the article is that Vmware has a very hot software product which manages running of several applications and several operating systems on one server. By using fewer servers, a company can reduce energy requirements and gain better manageability of the data in the system. This product is so hot that Intel decided to invest 218 million in the company for a 2.5% stake and Cisco came up with another 160 million for 1.5% stake. VMW, reported already earnings of $41 million dollars for the quarter ended on March 31, 100% higher than the same quarter of last year. The company expects to raise 866 million from the deal which part of it will go to pay off some debts to EMC and buy a building from Emc for its headquarters. EMC will retain 87% of the company and the rest will belong to Intel, Cisco and the public. In the event, VMW prices in the middle of the range which is $28 the market cap of the company will be $10 billion dollars.



This is what my thoughts are after looking at the facts. Since Intel and Cisco decided to put that much money in the company they must be seeing a huge market potential. The price they acquired it is not that much lower than the IPO price. They paid $8.7 billion for the company vs $10 billion for the ipo price, that is 17% below IPO which makes me feel that I am not getting screwed over that much, if I buy at IPO price. The problem is that I will not be able to get it at ipo price and I will have to chase the stock in the aftermarket.

BUT WAIT A SECOND. Emc will own 87% of the company which tranlates to $8.7 billion plus the cash they will get from the IPO. So lets say $9 billion. EMC is now worth $37.2 billion of which $9 billion dolars is VMW so this is the mathematical formula. VMW=.2419*EMC or EMC=4.133 * VMW. So if VMW goes up 10% EMC will go up 2.419%. I am buying EMC on Monday to participate indirectly on VMW's IPO.

S&P 500

Broadening top, the bears keep the bulls in check as they bring the price down to the flat line in spite of the bulls attempts to take the price up with higher highs. At the end the bears manage to break the flat line on volume and the following rally up to the flat line fails again on volume. The market action in general is very poor with expanding volume on the sell offs, today's sell off on 2.8 billion shares is a testament to that. I am expecting the bulls to put up a fight at 1427, the lows of 8/6, but I suspect that eventually we will head lower and visit the March lows.

NEXT IN LINE

It seems that the rest of the fertilizer companies who have been trading like 1999 Internet stocks are making tops today. Pot, above attempted a break out yesterday but today it sells below the breakout point of $86.74 with a double top forming. On a failed break out attempt usually what happens is that the price fails very fast to the next support line which is around $76 as the most recent buyer who positioned for the break out bail out and longer term holders are strategically take profits. I put a short on the stock today at $87.56 with a stop above 90 and so far so good. I will probably short some more on any intraday rally tomorrow.

MOS, also has the same pattern. Another failed break out.

TNH

After a $34 point drop the stock is attempting a short term bottom. It needs to penetrate 92.7 to have an intraday H&S bottom complete.