On April 30, I said that Microsoft (NASDAQ:MSFT) — with its recent near vertical ascent — likely will need to consolidate before ultimately having better odds at rising much higher. Four days after my column, the stock had pushed to a high of $33.91, where it ultimately found resistance that led to the past three days’ selloff.
From a medium-term perspective, the marginal overshooting past the $33 area has not changed my thesis, and I continue to favor the odds of a MSFT consolidation phase here in the near-term rather than a further meaningful rally. In fact, the move from $33 to $33.91 bumped the stock into the upper end of a wide trading range, which has defined resistance at an uptrending line dating back to May 2008.
In the long-run, however, I still see the stock moving higher because the series of higher lows and higher highs off the 2009 lows looks constructive. As such, long-term holders of Microsoft might be able to sell calls against their positions on upticks in volatility on a continued basis over the coming years, and by so doing, enhancing the yield on their holding.
However, the stock’s year-to-date rally of 23.5% has taken its chart vertical, which in the near-term is not sustainable at this rate. From April 18 to the highs on May 6 (so, a little more than two weeks), MSFT improved by roughly 18%. The sharp rally also quickly and easily pushed the stock past diagonal resistance dating back to March 2012, which gave the stock free range to shoot to its recent highs.
Given the animal spirits at work currently in the broader market, I am not considering the stock from the short side but rather am waiting for a better consolidation phase to set in.
Did the past three days of selling signal the start of a real consolidation phase? Only time will tell, but I am more interested in the stock again from the long side if it can retest a previous resistance level from September 2012 around the $31.60 mark, give or take 20 cents or so, or alternatively trade sideways for a couple of weeks.