Data storage giant Western Digital Corp. (WDC) gave the beaten down tech sector a lift on Tuesday evening, raising second quarter guidance while renewing a patent cross-license agreement with Samsung. The S&P 500 component gapped up at Wednesday’s opening bell, held gains in excess of 5% through the first hour of the session and could trade even higher in coming days.
PC peripheral stocks have struggled in recent years due to the exodus from home computers into tablets and smartphones. The industry now expects 2016 to end with a 6.4% sales decline, which is lower than previous estimates. Negative growth is expected to continue in 2017 at a slower pace, with analysts projecting a 2.6% annual decline while looking for overall flat sales into 2020.
WDC Long-term Chart (1993-2016)
The stock bottomed out at $1.00 in 1991 following a 4-year downtrend and turned higher, returning to the 1987 high at $16.32 in 1996. It broke out and zoomed higher, peaking at $54.75 one year later. The Dot-com bubble failed to end the subsequent downtrend, which carved a series of volatile lows into the 2001 bottom at $1.95, less than a point above the 1991 low.
It completed a 4-year basing pattern in 2003 and broke out above resistance at $8.80, entering an uptrend that carved several deep corrections into the June 2008 peak at 40.00. The stock turned sharply lower with world markets during the economic collapse, finding support at the base breakout in November. The subsequent recovery wave unfolded at the same trajectory as the prior decline, completing a V-shaped 100% retracement in November.
Price action then eased into a multi-year range, finally breaking out in 2013. It rallied through the 1997 high a few months later and continued to gain ground into its December 2014 all-time high at $114.69. The subsequent downtrend did extensive technical damage, with the stock losing 70% of its value into the May 2016 low at $34.99. The bounce since that time has carved a rising wedge pattern that’s undermined momentum after each small-scale breakout.
WDC Short-Term Chart (2014 – 2016)
The decline that started at the end of 2014 cut through the 1997 high at the start of 2016 signaling a major failure and remounted that level in September. This turnaround issued a 2B buy signal, which denotes the failure of bears to hold a resistance level, confirmed by higher prices into December. However, the rally has failed to build enough momentum to break free from the rising wedge pattern and make significant upside progress.
The stock gapped above the .386 retracement level after Wednesday’s opening bell, but it’s too early to tell if that gap will hold. If successful, the door will open to a continued advance that faces massive resistance in the mid-70s, where the .50 retracement level and broken third quarter lows have narrowly aligned. That barrier warns trend followers to expect a back-and-fill tape rather than quick recovery into triple digits.
On Balance Volume (OBV) fell to a 3-year low in May 2016 and turned higher, gaining ground at a faster pace than price. This signals a bullish divergence that predicts higher prices in coming months. In fact, this volume pattern contradicts the more bearish price pattern, telling us buyers will stay in control of price action well into 2017. At a minimum, it warns short sellers to look elsewhere for exposure.
The Bottom Line
Western Digital rose more than 6% on Wednesday morning after raising guidance and renewing a patent cross-license agreement with Samsung. The rally has lifted the stock to a 13-month high in the upper 66s, with good odds for continued gains into strong resistance in the mid-70s.
Disclosure: The author held no position in Western Digital at the time of publication
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