Western Digital Corp (WDC) stock has fallen sharply in the past week, but traders have a chance to capitalize on the potential for even more downside ahead.
Since WDC stock operates in the same space as the disk-drive makers Seagate Technology PLC (STX), the two stocks have tracked each other very closely over time. A chart move in one is therefore often a harbinger of a similar move in the other, and this spells opportunity when they experience a short-term divergence.
That’s the case right now, as Seagate stock has broken down to new lows while WDC shares continue to sit right at support.
STX stock was hit hard last week due to the combination of an earnings miss, multiple analyst downgrades and JPMorgan’s call that Seagate’s dividend is “unsustainable.” Western Digital also reported weaker-than-expected earnings, but the stock came into the week further above its support level and thus was able to avoid greater technical damage — for now.
For short-term traders, this represents a chance to take advantage of the likelihood that WDC stock will ultimately follow STX into breakdown territory.
Western Digital shares have already failed at support three times since the beginning of 2015, and the current deterioration in the company’s fundamentals indicate favorable odds that it will do so again.
Traders also have the weakness in the broader technology sector working in their favor, as the SPDR Technology ETF (XLK) appears to be rolling over after failing at resistance in April.
Watch WDC carefully for an opportunity to capitalize on further weakness if it indeed breaks down below its prior low point of $38.64.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.