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Trade of the Day: Western Digital (WDC)

As sentiment turns more bullish, this cloud computing stock is primed for big profits


Stocks continue to move higher and are ignoring a lot of negative news along the way. Our index indicators are giving bullish readings, unchanged from last week, as the major indexes continued to grind higher this week, led by a 1.3% rise in the Nasdaq. Geopolitical concerns have been pushed to the sidelines as interest rates and accommodative central banks remain the focus.

The current bullish trend remains in place as long as the indexes stay above their respective 50-day moving averages, which is currently at 16,870 for the Dow Industrials, 1,948 for the S&P 500 and 4,350 for the Nasdaq.

Our internal indicators are mostly bullish, with only the 200-day Moving Averages Index sitting below its 50-day moving average. The Advance/Decline Index and Cumulative Volume Index remain bullish. Eight of nine S&P sector funds are bullish, one more than last week, with the Industrials Fund being the lone holdout. Also, volatility indexes have retreated from their recent bounce higher.

Treasury bonds (TLT) pulled back Thursday following a run up spurred by the same geopolitical concerns that stock markets are ignoring. TLT is in a primary bullish trend and will remain so by staying above its 50-day moving average, which currently sits at $112.70. The U.S. dollar is picking up some spillover activity from Treasuries, as it has poked above its 200-day moving average for the first time in almost a year, though its trend remains bearish.

Commodities are also moving away from the “risk-off” trade. Copper has resumed its uptrend, a sign that economic growth might be getting better. Oil is treading water around its 50-day moving average. But gold has fallen back into a primary bearish trend and is showing signs of breaking down. So the geopolitical concerns that were prevalent a week ago look to be vanishing.

Continue to hold bearish positions, as summer is a time of lighter-than-normal trading volume and market moves can become exaggerated. However, with stock indexes remaining bullish and as sentiment improves, options traders should begin to weight more toward bullish positions than they have been.

Today’s recommendation is a bullish trade on Western Digital (WDC), a cloud-computing company. After reporting a disappointing earnings per share figure in the first quarter, WDC shares struggled throughout May but have been trending higher in June and July. Last week, WDC did particularly well after receiving an upgrade from Robert Baird analysts, who also raised their price target on the stock from $95 to $120. All in all, 20 analysts currently consider Western Digital to be a buy, while just seven rate it as a hold and one gives it an underperform rating.

Buy the WDC Oct 110 Calls at $1.80 or lower (WDC closed Thursday at $99.60). After entry, take profits if the stock price hits $105.30 or the option price hits $4.00. Exit if the stock price closes below $94.70.

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