Data Storage Stocks in Retreat After Seagate Miss

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Data Storage Stocks in Retreat After Seagate Miss

By Alan Farley | July 26, 2017 — 12:00 PM EDT

Shares of data storage companies took a hit on Tuesday after Seagate Technology plc (STX) missed fiscal fourth quarter earnings and revenue estimates by a wide margin while lowering full-year guidance. A CEO replacement and restructuring plan that includes job cuts failed to stem intense selling pressure that dumped the stock more than 16%. Rival Western Digital Corporation (WDC) fared better, with shares gapping down more than three points but closing well off the early low ahead of the company’s July 27 report.

This specialty hardware sector has failed to keep pace with the strongest tech market in decades, held down by the continued implosion of PC sales as well as steep competition from foreign rivals that include Samsung Electronics Co., Ltd. (SSNLF). According to industry think-tank Gartner, worldwide PC sales fell 4.3% in the second quarter of 2017, continuing a multi-year exodus into mobile devices that favor flash storage manufacturers over traditional disk drive and SSD companies. (See also: Component Shortages Hurt PC Shipments in Q2.)

STX Weekly Chart (2011 – 2017)

A post-IPO rally topped out at $31.35 in 2003, yielding multiple breakout attempts that carved a triple top pattern into a 2008 breakdown. Selling pressure accelerated during the economic collapse, dropping the stock to an all-time low at $2.98 in January 2009, ahead of a bounce that broke out above the prior decade’s highs in 2013. That uptick caught fire, generating a multi-year rally that posted an all-time high at $69.40 in December 2014. (For more, check out: Top Mutual Fund Holders of Seagate.)

The stock lost ground through 2015, giving up two-thirds of its value into the May 2016 low in the upper teens. The subsequent recovery wave stalled at the .618 Fibonacci sell-off retracement level near $50 in the first quarter of 2017, allowing aggressive sellers to generate a steep downtick that has cut yearly gains in half while opening the door to a test of the downtrend low. At the same time, bearish price action has drawn a tough resistance zone in the $40s.

On-balance volume (OBV) offers hope for beaten-down bulls, entering an impressive 2016 accumulation phase that reached an all-time high just two months ago. This thrust generates a bullish divergence that indicates loyal institutional sponsorship despite meager performance so far in 2017. At a minimum, this impressive shareholder base predicts that the current downdraft will end quickly, ahead of a bounce that is likely to determine the stock’s long-term fate. (See also: Seagate Misses Q4 Earnings and Revenues, Appoints CEO.)

WDC Weekly Chart (2011 – 2017)

Western Digital stock topped out in the mid-$50s in 1997 and rallied within 15 points of that level in 2008, ahead of a steep decline that bottomed out at a four-year low near $11. The subsequent bounce unfolded at the same trajectory as the prior decline, carving a V-shaped pattern into the 2010 high just above $47. The stock spent the next three years hovering below multi-decade resistance, finally breaking out in 2013 and heading into a powerful trend advance that more than doubled the stock’s price into the December 2014 top at $115. (See also: What’s in Store for Western Digital in Q4 Earnings?)

A steep downtrend gathered force into 2016, finally hitting bottom at a three-year low in May, ahead of a persistent recovery wave that stalled within two points of harmonic resistance at the .786 Fibonacci sell-off retracement level in June 2017. Slightly higher highs since that time still have not tagged the magic level, which will be tough to break if its rival’s bearish results accurately reflect current business conditions.

Technically oriented market players looking for post-earnings guidance should watch the edges of a rising wedge pattern under construction for the past six months (red lines). A wedge breakout above $96.50 would open the door to the triple digits, while a wedge breakdown through $88 would also break a rising channel in place since October 2016, exposing continued downside into the 50-week exponential moving average in the upper $70s. (For more, see: Why Western Digital’s Soaring Stock May Stall.)

The Bottom Line

Seagate reported a weak quarter while reducing forward guidance, putting a dead weight on the data storage sub-sector, which has underperformed broad tech benchmarks in recent years. The bearish results could signal a long-term top for the group, ahead of cyclical declines that could post multi-year lows. (For additional reading, check out: 5 Chipmakers That Will Win as Smartphone Sales Slow.)(Why?)

Published at Wed, 26 Jul 2017 16:00:00 +0000

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