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Mr. Softee Overloved & Overbought

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Dow and Nasdaq-100 component Microsoft, Corp. (MSFT) ran in place in the first hour of Friday’s U.S. session, following a mixed fiscal third-quarter earnings report that triggered an initially bearish reaction, dropping the software giant more than 2-points in Thursday’s post-market. Aggressive sellers could make a return trip in coming hours or days, knocking the stock off its high pedestal near an all-time high.

Quarterly revenues barely met expectations, coming in at $23.56-billion compared to $23.62 consensus. Office and cloud computing divisions posted strong growth while the personal computing segment continued to contract, dropping 7%. Lower phone revenue offsets decent OEM sales while Xbox failed to shine as it has in prior quarters, posting a mediocre 4% increase.

The stock hasn’t pulled back since June 2016, trading in a narrow channel that recently entered its ninth month. This is positive but unsustainable price action, setting the stage for an eventual correction that’s likely to drop the stock more than 20% in a relatively short time frame. As a result, sidelined players should keep their powder dry at present, waiting for that long-term buying opportunity to unfold.

MSFT Long-Term Chart (1994–2017)

MSFT

The stock took off in a historic rally in the 1990s as a proud member of the legendary Four Horsemen of big tech. It split seven times during the decade, finally topping out near $60 at the turn of the millennium. Keep that price in mind because it took the stock more than 16 years to complete a round trip. A government monopoly investigation spooked long time shareholders in 2000, triggering a steep decline that aligned perfectly with the end of the Dot-com bull market.

It found support in the upper teens in December 2000 and bounced to $34 in the middle of 2001, with those boundaries containing price action through most of the mid-decade bull market. A rally finally broke range resistance in November 2007, adding just three points, ahead of a failed breakout and decline that accelerated during the 2008 economic collapse.

Intense selling pressure undercut the 2001 low, dropping the stock to a 10-year low in March 2009, ahead of a recovery wave that stalled above $30 in 2010, The stock broke resistance at that level in 2013 and embarked on the strongest trend advance of the decade, reaching within a few points of the 1999 high in October 2014, ahead of a 2016 breakout that’s gathered momentum into the second quarter of 2017.

MSFT Short-Term Chart (2015–2017)

MSFT

The stock topped out three points under long-term resistance (blue line) in the last trading week of 2015, giving way to a rectangular platform that continued into the October 2016 breakout. It tested new support for just 6-weeks and took off in a steady rally that’s carved very narrow channel boundaries. These low volatility conditions won’t last forever, with a channel breakdown likely to signal a correction that lasts a minimum of six to nine months.

On Balance Volume (OBV) topped out in the second half of 2014 and entered a steady distribution wave that ended in the middle of 2016. Subsequent buying pressure has so far failed to mount the long trendline of lower highs, signaling a major bearish divergence that points to inadequate sponsorship. Even so, this red flag hasn’t impacted the current rally wave, which shows few signs of reaching exhaustion.

The Bottom Line

Microsoft is trading flat after earnings, but an initial sell-the-news reaction tells us that bears are hiding under the surface, looking for an opportunity to drag the stock to lower prices. Broadly positive Nasdaq-100 and Dow Industrial Average technicals are supporting the current price, but those benign influences are likely to wane over the summer months.

<Disclosure: the author held no positions in aforementioned stocks at the time publication.>

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