Western Digital Corp: This Could Send WDC Stock Soaring

Western Digital CorpA Bottom for WDC Stock?

Western Digital Corp (NASDAQ:WDC) stock has suffered a 68% decline in share price since peaking on December 19, 2014. I can go into 101 fundamental reasons why Western Digital stock has plummeted and why it could rise again, but that’s not my objective here. Instead, WDC stock may have the answers some are looking for strictly from a technical analysis perspective.

WDC stock’s gains were erased in half the time it took to rise. The trend has been straight downward and embedded. Trends don’t reverse overnight, as there is usually some evidence to suggest a reversal is at hand. Western Digital stock is currently sitting in a position that suggests a reversal may be coming.

Support for WDC Stock

For shareholders of Western Digital, $40.00 is a significant share price level. WDC stock spent the better part of the three years from 2010 to 2012 attempting to break above that price to no avail.

In early 2013, traders were finally able to break above the $40.00 price point. WDC stock subsequently charged ahead with only minor pullbacks until it reached its top at $110.00.

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As is the case with support and resistance, when a major resistance level is broken to the upside, that level becomes the support level. Often, prices will return to test that support level, offering interested investors a second chance to buy.

Western Digital Corp NASDAQ Chart

Chart courtesy of www.StockCharts.com

WDC stock sank in 2015, caught in a perpetual slide until finally halting its descent right near the $40.00 support level.

Trend Reversal

WDC stock has been testing support around $40.00 for approximately five months. In the process of testing this major support level, WDC stock is forming a chart setup pattern that traders can use for execution.

The current setup we are witnessing in WDC stock is a head and shoulders bottom—an inverted head and shoulders pattern. The significance of this trading pattern is that it foresees a reversal of the current trend. In other words, in a trader’s toolbox, this pattern serves as a major trend reversal indicator.

Western Digital Corp NASDAQ

Chart courtesy of www.StockCharts.com

The pattern consists of three troughs and a neckline, where the middle trough (the head) is the largest and the first and third troughs (the shoulders) are usually of equal size. The neckline is formed by connecting the reaction highs. The setup is confirmed when the stock’s share price closes above the neckline—signaling a reversal is at hand.

Not only does this pattern foresee a trend reversal, but it also outlines a possible target upon a successful break above the neckline. The depth of the head from the neckline is used to project a target price. In this case, the neckline is $50.00 and the depth of the head is $15.00, so the price target is $65.00. Note that this is a projected price and not an absolute target.

Possible Paths

To know with exact precision where a stock will trade requires a crystal ball—I have yet to come across a real one.

As a trader, I use trend patterns, resistance levels, and Fibonacci retracement numbers as a guide to help ascertain price objectives and possible paths. This third chart outlines a possible path for WDC stock.

Western Digital Corp Chart

Chart courtesy of www.StockCharts.com

Possible path assumptions:

  1. The neckline may be tested as support in the near future.
  2. The downtrend line could be broken and a new uptrend could ascertain itself.
  3. Fibonacci retracement numbers can be used to identify counter-trend price objectives. I expect the Fibonacci 50%–62% area to offer resistance, as traders will be eyeing this area as a target to exit new long positions.

Once again, this is just one possible path.

The Bottom Line on WDC Stock

WDC stock has returned to test support and offer investors a second chance at a major price inflection point. The head and shoulder bottom is signaling a trend reversal and a bullish price objective.

Having said that, let us not overlook the fact that when using technical indicators for signals, some signals may prove to be false. If WDC stock’s price closes below the neckline at $50.00, it could be cause for concern.