STX breaks down, WDC trying to follow the suit.

Welcome to Quarter 2!

It seems last night “someone” got some news. So today morning “someone” decided to let go of boat load of STX.

In such cases where stock not only craters through a consolidated pattern but also breaches the 50 DMA on high volume, we need to do following –

  • Is the action happening on high volume?
  • Wait till next day’s action to see if buyers step in or is this a sign of bulls handing over the baton to bears.
  • Is this a high flier with multiples in higher end of industry spectrum or 5 year PE range of the stock? If yes then trim your position because in general this is precursor to more decline and change in the trend. In our case STX is trading at lower end of 5 year PE range. Also STX is still cheap in comparison to it’s peers.
  • Is there a catalyst – news – that changes the fundamental or long/short term outlook of the company? Such as company trimming it’s forecasted earnings or union strike at manufacturing facility or lowering of profit margin. See this. – THis is it. We are looking at decline of margins. This is somethings that I had mentioned towards the end of my article – Devil’s Advocate.
  • Is there a nearby support? Yes STX has support at $24.5.

Remember one last thing – Market runs by sentiments and you are merely trying to benefit out of this crowd mania. 

Finally, small loss today might trun into big loss tomorrow. So be alert.

 Below you see a 15 min chart of WDC where it does the same thing as STX.