An Island Reversal For WDC

06/28/07 09:27:50 AM

by Arthur Hill

The island reversal has short-term bearish implications for Western Digital, which could lead to long-term complications.

Security: WDC
Position: Hold

On the daily chart (Figure 1), Western Digital (WDC) surged above 20 with a gap on June 11 and promptly reversed course with a gap down on June 18. The gaps created an island above 19.6, and buyers on this island are now trapped with losses. The stock managed to firm after the gap but needs to move back above 19.7 to fill the gap and revive the bulls.

FIGURE 1: WDC, DAILY. Western Digital surged above 20 with a gap on June 11.

Graphic provided by: Telechart 2007.

The stock found support from the 200-day moving average and broken resistance around 18.85 and consolidated the last few days. The sharp gap down was a shock to the system, and the consolidation is absorbing this shock. A move below the consolidation low would break the 200-day moving average and call for a continuation lower. The initial downside target would be the next support area around 17.5.

While a move to 17.5 does not seem too drastic, it would do long-term technical damage and signal a continuation of the December–April decline. The April–June advance does not look like a classic rising wedge or rising price channel, but the gap above 20 could just be an overshoot because it failed miserably. If we treat this as an overshoot and basically ignore the surge above 20, then a rising price channel takes shape, and it looks more like a corrective advance.

FIGURE 2: WDC, DAILY. The lower channel trendline marks support just above 18 and a move above this trendline would break the channel.

Graphic provided by: Telechart 2007.

The lower channel trendline marks support just above 18, and a move below this trendline would break the channel. Even if we do not accept the channel/overshoot theory, the lower trendline is valid and a break would be negative. I would then expect a test of support from the April lows and possibly even a move below these lows.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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ISLAND REVERSAL

An Island Reversal For WDC

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