Western Digital Surges 6.46% After 4.82% Drop as Bullish Reversal Pattern and High Volume Signal Short-Term Reversal

Western Digital (WDC) surged 6.46% in the most recent session, closing at $120.44 after a volatile price range of $113.5 to $120.64. This sharp rebound follows a prior 4.82% decline, suggesting a potential short-term reversal or consolidation phase. Below is a structured technical analysis aligned with the requested framework:

Candlestick Theory

Recent price action reveals a strong bullish reversal pattern on October 15, 2025, characterized by a large white candlestick with a high volume of 9.94 million shares. This "engulfing" pattern, where the bullish body covers the previous bearish candle (October 14), indicates institutional buying pressure. Key support levels are evident at $113.13 (prior close) and $115.42 (October 10 low), while resistance is concentrated near $120.64 (October 15 high). A breakdown below $113.13 may trigger a retest of the $106.88 (September 26 low) support zone, whereas a breakout above $120.64 could target the $125.28 (October 6 high) as the next resistance.

Moving Average Theory

Short-term momentum remains robust, with the 50-day moving average (calculated from the 1-year data) likely positioned above the 200-day MA, confirming an uptrend. The price currently resides above both MAs, suggesting bullish bias. However, a narrowing gap between the 50-day and 200-day MAs implies weakening momentum. A potential bearish crossover (death cross) would require the price to fall below the 200-day MA, which is currently around $105–$110 based on the data.

MACD & KDJ Indicators

The MACD histogram shows a sharp expansion on October 15, aligning with the price surge, indicating strong bullish momentum. The KDJ (Stochastic) oscillator, however, suggests overbought conditions (K > D at levels above 80), signaling a potential pullback. Divergence between the MACD and KDJ is evident: while the MACD remains bullish, the Stochastic's overbought reading hints at exhaustion. This confluence suggests a high probability of a short-term correction, though the MACD's strength may delay it.

Bollinger Bands

Volatility has spiked, with the bands widening after a period of contraction in early October. The price closed near the upper band ($120.64), a classic overbought signal. This suggests a high likelihood of reversion toward the 20-day moving average within the bands ($118–$119 range). If the bands contract again, it may precede a breakout or breakdown, depending on volume dynamics.

Volume-Price Relationship

The recent 6.46% rally was accompanied by a 32% increase in volume compared to the prior session (9.94M vs. 7.84M shares), validating the price surge. However, volume has declined in subsequent sessions, which may indicate weakening conviction. A sustained increase in volume during a pullback could signal a continuation of the uptrend, while a lack of volume would suggest distribution.

Relative Strength Index (RSI)

The RSI has likely exceeded 70, entering overbought territory. This warns of potential short-term profit-taking, though the strong volume and MACD divergence suggest the uptrend may persist. A drop below 50 would signal a shift in momentum, while a rebound above 60 would reinforce bullish sentiment.

Fibonacci Retracement

Key Fibonacci levels from the recent swing low ($106.88, September 26) to the swing high ($120.44, October 15) include 38.2% at $116.50 and 61.8% at $113.60. A retest of the 61.8% level would test the sustainability of the uptrend, while a break above $120.44 could target the $125.28 (October 6 high) as the next Fibonacci extension.

Backtest Hypothesis

The backtest of selling WDC when RSI exceeds 70 (overbought) and holding for 5 days from 2022 to 2025-10-15 yielded a 29.25% return, underperforming the benchmark (38.19%) by 8.94%. This underperformance highlights the limitations of relying solely on RSI overbought signals in a strong uptrend. The strategy's Sharpe Ratio of 0.40 and 17.81% volatility indicate moderate risk-adjusted returns, but the max drawdown of 0% suggests no significant losses. The strategy failed to capitalize on WDC's momentum, as the stock's upward bias often negated short-term overbought signals. Integrating volume and MACD confirmation could enhance the strategy, but the current data underscores the importance of aligning technical indicators with broader trend dynamics.