Microsoft Corporation (MSFT) has taken full advantage of the latest tech buying spree, lifting above $100 for the first time in its long public history. The rally marks the next stage of an assault on psychological resistance that began in January when the long-term uptrend stalled in the mid-$90s. The stock had been creeping slowly toward the magic number in the past four months, finally crossing the threshold last week.
However, a rapid advance toward $125 or $150 appears unlikely, given the rally’s gentle slope, which has added 14 points in the past seven months. In addition, pullbacks have failed to reach the 200-day exponential moving average (EMA) since July 2016, exposing Mr. Softee to significant downside if trade wars generate a broad-based downturn. Finally, price action has been locked within a rising channel since December 2017, limiting short-term upside to the $102 to $104 range. (See also: Microsoft Surpasses Alphabet in Market Value.)
MSFT Long-Term Chart (2000 – 2018)
The stock ended a decade-long uptrend near $60 at the turn of the millennium, when shareholders abandoned ship in response to Justice Department monopoly allegations. It sold off a three-year low in the lower $20s in December 2000, bottoming ahead of other tech giants during the bear market, while a bounce into June 2001 failed to pierce the 50% sell-off retracement in the mid-$30s. Price action held within those range boundaries for the next six years, lifting briefly to a new high in 2007.
That uptick reversed quickly in a steep decline that broke range support in November 2008. Selling pressure eased in the mid-teens in March 2009, marking an end to the nine-year downtrend and start of a recovery wave that stalled five points under the 2007 high in 2010. It took three years to mount that barrier, ahead of a powerful trend advance that posted exceptionally strong gains into the fourth quarter of 2014, when the rally faded 10 points below the multi-decade high.
An August 2016 breakout carved a narrow rising channel that added 20 points into October 2017, when the stock gapped up and entered a higher channel with more points between highs and lows. It has held with those boundaries into June 2018, with support at $91 and resistance at $102.50 constraining price movement. The monthly stochastics oscillator has matched bullish action in the past few years, failing to reach the oversold level since March 2015.[Check out Chapter 4 of the Technical Analysis course on the Investopedia Academy to learn about determining whether a stock is overbought or oversold]
MSFT Short-Term Chart (2017 – 2018)
The October 2017 gap posted an upside channel break, signaling exceptional strength, while the sell-off into February 2018 marked highs and lows in a new channel with support just below the 50-day EMA. The stock carved a rising wedge within the channel through May and broke out last week at the same time it traded above $100. This buying wave opens the door to channel resistance, where sellers are likely to reload positions.
On-balance volume (OBV) posted the second lower high since 2007 in 2014 and bounced to that resistance level in 2017. It broke out in February 2018, but the indicator remains well below the 2007 peak. However, the company bought back $117 billion in shares into the middle of 2017, skewing the stock’s traditional correlation between price and volume. As a result, this bearish divergence can be safely ignored.
The rising wedge breakout bodes well for additional upside, but market players need to respect channel resistance, keeping their powder dry until this obstacle is mounted. In addition, sellers are likely to trigger at least one downturn that drops the price back to channel support and shakes out weak hands. Jumping in during a reversal off that level, currently in the low $90s, may offer the most advantageous reward:risk. (For more, see: Microsoft to Lead Surge in IT Industry Profits: Moody’s)
The Bottom Line
Microsoft shares traded above $100 for the first time last week, but testing around this price zone may trigger reversals before upside momentum sets into motion. As a result, the best trade entry may come on a pullback to channel support in the lower $90s. (For additional reading, check out: Microsoft’s Value $1 Trillion Within 12 Months: MS.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>