Shooting Star in Consolidation Signals Top for WDC

Following a 52-week low on 16 May 2016, Western Digital Corp (NASDAQ: WDC) retraced 61.8% of the entire 52-week high-low pattern.  The tight consolidation pattern culminated in a shooting star candle that pierced the upper Bollinger Band on 20 December.

WDC Daily Chart

The shooting star pattern at the high of an uptrend is considered very bearish.  Consider that the stock has opened with a gap up and traded to a pattern high.  At that point, however, significant supply came into play, and the bears were able to push the price back below the open to close near the low of the day.  The short term indication is for the stock to retreat from here.

The RSI(9) pattern confirms this bearish signal.  Through all of December, the RSI has printed a bearish divergence pattern, showing weakness while the stock drew new highs.  Additionally, the current two week pattern appears to be forming an island top.

The current consolidation pattern formed at the exact same level of a similar tight horizontal move from 26 October to 9 November 2015.  The duration is virtually identical to what is in progress, now.  The 2015 consolidation was the start of the march towards the 52-week low.

The volume pattern since the 7 December gap up suggests supply is dominating as price approaches a strong pivot line around 68.90.  Additionally, the SMA(10), EMA(20), and EMA(30) lines are rapidly separating into a wide fan.  Reversion to the mean suggests a reversal at least to the EMA(20) line.

Before we rush into a short position, however, there are two major considerations.  First, the overall market is exhibiting an extraordinary level of exuberance.  The strength of this upward push in the market is not conducive to trading to the short side, at the moment.  Second, WDC trades ex-dividend on 28 December, paying a dividend of $0.50.  Personally, I prefer not to hold a short position through ex-dividend since, in addition to the interest paid on the short holding, that dividend is also due to owner from whom the stock was borrowed for the short sale. 

For now, WDC will be added to our watch list.  Once the overall market enters a pull-back from the current level of exuberance - something entirely likely once to DOW touches the mythical 20,000 level - this may still be a prime candidate to ride as a short position. Of course, if the stock breaks above the high of today's shooting star, thus invalidating the bearish signal, there is a decent amount of headroom leading towards the prior 52-week high.  Let's see which direction this stock would like to take.  A break above 71.64 will be a long signal whereas a break below 66.83 will be a short signal.  As always, we'll play what the market chooses to give us.

Happy Trading.