Big Volume Breakout Followed By A Return To Gap Support

I love these trades. Western Digital (WDC) reported earnings on Monday, January 22nd, easily surpassing both revenue and EPS estimates.

Revenues came in at $3.03 billion (actual) vs. $2.99 billion (estimate). Meanwhile, WDC posted a loss, but one that was considerably less than expected. Actual EPS was -0.69, while Wall Street was looking for -1.33. The market reaction? A small decline of roughly 2.5% at the opening bell, but since then, WDC has fallen a bit further to test key closing price and gap support at 57.00. Thursday's intraday low in the first hour of trading touched 56.59, but a rally over the balance of the day saw WDC finish at 57.40, above key support. Check out the chart:

Enter Western Digital Corp. (WDC):

WDC has been the story of several upgrades recently and Morgan Stanley replaced NVIDIA Corp (NVDA) with WDC as a "Top Pick" at the Wall Street firm, raising its price target from 52 to 73 in the process. Thursday's candle was promising in that it was a "hammer" candlestick, which many times "hammers" out a bottom in stock price. While I don't view WDC as a fast-mover, like many other technology names, I wouldn't be surprised to see a quick move back to 63 to test Monday's high. Should gap support at 57 fail to hold, then the next key support level would be the bottom of gap support at 54.77.

Happy Trading! Tom Bowley Chief Market Strategist EarningsBeats.com Better Timing. Better Trades.