WDC Surges 11.36% on Bullish Engulfing Pattern as Overbought RSI 72 Flags Potential Reversal Risks

Candlestick Theory

Western Digital (WDC) has experienced a three-day bullish streak, with a 11.36% surge in the last three sessions. The most recent candlestick (September 22) shows a strong bullish body with a 5.42% gain, forming a potential Bullish Engulfing pattern as it absorbs the prior session’s range. Key support levels are emerging at $97.66 (September 12 close) and $96.15 (September 11 close), while resistance is evident at $112.83 (September 22 high). The price action suggests a continuation of the uptrend, but traders should monitor for bearish reversals such as a Hanging Man or Shooting Star if the price fails to clear $112.83.

Moving Average Theory

Short-term momentum aligns with the 50-day moving average ($85.40), which is above both the 100-day ($80.20) and 200-day ($75.10) averages, confirming a bullish bias. The price remains well above all three moving averages, reinforcing the uptrend. However, the 50-day MA is approaching convergence with the 100-day MA, which could signal a potential slowdown in momentum. A breakdown below $95.15 (September 18 close) would invalidate the bullish bias, while a sustained move above $112.83 could trigger a retest of the 200-day MA as a dynamic support.

MACD & KDJ Indicators

The MACD (12,26,9) is in positive territory, with the histogram expanding, suggesting strengthening bullish momentum. A golden cross occurred in late August, but the RSI has since entered overbought territory (>70), indicating potential exhaustion. The KDJ indicator (9,3,3) shows K-line nearing overbought levels (~85), while the J-line has begun to diverge, hinting at a possible short-term pullback. However, the D-line remains elevated, suggesting the uptrend may persist. Divergences between MACD and KDJ—particularly the overbought KDJ—warrant caution, as they may foreshadow a reversal.

Bollinger Bands

Volatility has expanded as the price approaches the upper band of the Bollinger Bands (20-period, 2σ), with the bands widening from a prior contraction in late August. The current price of $112.41 sits near the upper band, indicating overbought conditions and potential for a mean reversion. A break below the middle band ($100.94) would signal a shift in volatility and could trigger a selloff. Conversely, a sustained move above the upper band may indicate a new breakout phase.

Volume-Price Relationship

Trading volume has surged in recent sessions, with the September 22 volume (9.69M shares) being the highest in over a month. The volume profile supports the bullish price action, as higher volume accompanies the recent gains. However, volume has begun to taper slightly on the last two up days, suggesting waning conviction. A divergence between price and volume—where volume declines despite rising prices—could foreshadow a reversal.

Relative Strength Index (RSI)

The 14-period RSI is currently at 72, firmly in overbought territory, aligning with the KDJ’s overbought signal. While overbought conditions often precede corrections, the RSI has not shown bearish divergence (i.e., lower highs despite higher price). This suggests the uptrend may persist, but traders should remain cautious of a pullback to the 50–60 RSI range. A drop below 50 would signal a shift in momentum.

Fibonacci Retracement

Key Fibonacci levels from the August 5 low ($74.21) to the September 22 high ($112.83) include 38.2% ($96.60), 50% ($93.52), and 61.8% ($90.44). The current price is above the 38.2% retracement level, indicating strong bullish momentum. A pullback to the 50% level could test its validity as support, while a break below 61.8% would suggest a deeper correction.

Backtest Hypothesis

A backtest of a strategy buying WDC on MACD golden cross and KDJ overbought signals, with a 5-day holding period, yielded a -19.55% return from 2022 to 2025—significantly underperforming the benchmark’s 39.12%. The negative excess return (-58.66%) and CAGR (-5.72%) highlight the strategy’s poor efficacy, likely due to overbought conditions failing to trigger reversals in a strong uptrend. The max drawdown of 0.00% and Sharpe ratio of -0.22 further underscore the high risk and low risk-adjusted returns. This suggests that relying on MACD and KDJ overbought signals in isolation may be unreliable for WDC, particularly during extended bullish phases.