Western Digital (NASDAQ:WDC) may be ready for a significant technical break-out. It could result in the shares climbing by almost 18%. Options betting is suggesting that traders see the shares rising sharply by the middle of March. There may be some fundamental reasons for this improving outlook, with signs of improving pricing for NAND flash memory.
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There have recently been two articles written in Digitimes which suggest that the pricing for NAND memory will improve in 2020. One report was written on December 19, noting that the NAND flash contract prices may rise by up to 15% in the first quarter of 2020. Another article was written on January 2, suggesting that contract prices could increase by up to 40% this year.
Higher prices could certainly help Western Digital, and it could be one reason why some traders are betting the recent equity rally continues. The $75 call options saw their open interest levels for expiration on March 20 rise by around 9,000 contracts on January 3. According to the data from Trade Alert, the calls traded on the Ask, and indicate that the options were bought, and are betting that Western Digital's stock will rise. The options traded for roughly $1.50 per contract, and that means the stock would need to rise to $76.50 or higher for the trader to earn a profit.
The chart shows that the stock is nearing a big break-out should it rise above resistance in the $65.75 to $66 range. If that happens, the stock may rise to the next level of resistance at approximately $75.65. The stock appears to have formed a double bottom in December 2018 and June 2019, a bullish reversal pattern. It has set up what appears to be a longer-term uptrend in the stock.
Additionally, the relative strength index is pointing to higher prices over the longer term. The RSI has been steadily trending higher since September of 2018. It, too, suggests that the stock has longer-term uptrend that formed in it.
However, should the stock not be able to break-out and rise above $65.75, then it could be heading lower to $57.35. Additionally, an analyst at Benchmark recently noted a better pricing environment for NAND, but that it might not provide a benefit to Western Digital. The analyst noted that inventory levels were still high.
It seems currently based on the technical chart and some option betting, investors and traders are thinking a better pricing environment for NAND led to a higher stock price for Western Digital. The next few weeks will be telling regarding the future direction of the stock, which at the moment appears to be higher.
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About The Author
I first fell in love with the stock market when I was 16 years. Now, 25 years later and after a long career as a buy-side trader, I share all of my experience with you daily with timely thoughts throughout the day in Reading The Markets. I use fundamental, technical, and options market analysis to identify individual stock ideas for you.
This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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