Big technology stocks are stepping on to the earnings stage over the next couple of weeks, and Microsoft Corporation (NASDAQ:MSFT) will be among their number. MSFT stock has acted splendidly for the past seven months or so. But now, it’s coming into a bigger-picture area on the chart that could offer some more headwinds.
It’s difficult to make risk-adjusted choices — whether in the stock market or in life — without perspective. During a conversation with a group of fellow traders yesterday, I was reminded how short-term-ism is an epidemic in this industry.
Everyone in this group was discussing potential breakouts or breakdowns in this and that stock. But until I brought it up, they ignored the fact that the broader stock market for the past month-and-a-half has been stuck in a tight consolidation range.
In other words, if most stocks as represented by the indices are stuck in a tight range, then any given stock is likely to do the same, until a broader directional move takes hold.
We need this type of perspective when we look at MSFT stock at the current juncture.
Specifically, Microsoft earnings are scheduled for Thursday, Jan. 26, after the close of trading. The last time I discussed shares of MSFT — on Nov. 30, 2016 — I offered that although the stock at the time was already reaching bigger-picture technical resistance, upside toward the $64 area into year’s end looked likely.
Over the ensuing three weeks, Microsoft proceeded to rally, and on Dec. 22, it hit my $64 price target right on the nose. But shares have been consolidating in a sideways pattern ever since.
MSFT Stock Charts
Looking at the weekly chart, we see that the year-end rally in MSFT stock pushed it right to the very upper end of a multiyear uptrending channel that I marked with the purple-dotted parallels.
At the same time, the stock’s momentum oscillators — such as the MACD at the bottom of this weekly chart — remain stretched on the upside.
To be clear, this doesn’t mean Microsoft stock has to correct to the downside immediately. It just means the upside momentum here likely will be capped.
On the daily chart, note that since last summer, MSFT shares have traded in several well-defined consolidation patterns, each one leading to a next leg higher.
The million-dollar question now is whether this latest multiweek consolidation pattern (which on the above chart is taking place at the very upper end of the longer-term uptrend) will resolve to the upside or to the downside.
Luckily, traders now have well-defined levels to focus on:
- A break and hold above $63.50 could open upside toward $65-$66.
- Alternatively, a break and hold below the 50-day simple moving average (orange, currently around $61.60) could be the beginning of a mean-reversion lower with a first price target in the $56-$57 area. However, traders must respect any sharp bearish reversal upon an initial post-earnings breakout (a breakout fake-out move) as a stop-loss signal on longs.
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