Microsoft Corporation (NASDAQ:MSFT) will report its quarterly earnings on Thursday, April 27, so today we’ll be looking at the setup in MSFT stock.
But I should point out that Thursday is a major day for large-cap tech earnings, and arguably for the near- to intermediate-term direction of the Nasdaq-100. In addition to Microsoft, Alphabet Inc (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN), Baidu Inc (ADR) (NASDAQ:BIDU), Expedia Inc (NASDAQ:EXPE) and Intel Corporation (NASDAQ:INTC) are among the many big-tech firms dropping quarterly results after Thursday’s bell.
But I want to focus on Microsoft, because given the most recent multiday rally in MSFT stock to the top end of its trading channel, the Q3 earnings report and outlook could turn out to be an important “show and tell” event — and provide ample opportunities for traders to pounce on.
Before looking at the trading opportunity, let’s get some perspective. Microsoft shares make up about 8% of the Nasdaq-100, which frequently is represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). Amazon, Alphabet, Intel and Microsoft together make up about a quarter of the index.
While it is entirely possible that given these companies’ different businesses, their respective stock reactions to earnings could cancel each other out and thus lead to little movement for the Nasdaq-100, we at least have to consider what will happen if they trade in sync come Friday morning. Such a scenario could lead to a chart-altering move, and also likely jostle the broader U.S. stock market.
MSFT Stock Charts
When I last discussed Microsoft on Jan. 24 — two days before its last earnings repor t– O offered that should the stock be able to overcome the $63.50 area, this could open upside toward $65-$66. Sure enough, MSFT popped after the Jan. 26 earnings report, and the $66 price target was reached within one day.
However, this area then acted as technical resistance … until Friday, April 21, anyway.
On the multiyear weekly chart, we see that MSFT stock continues to grind higher and trade well above its 50-, 100- and 200-week simple moving averages (yellow, blue and red lines, respectively).
We also see that according to the MACD oscillator at the bottom of the chart, momentum thus far in 2017 is making a lower high versus the 2016 momentum highs.
I personally won’t assign too much credibility to this indicator alone. However, it is worth noting that MSFT stock is once again trading at the very upper end of the diagonal resistance line (upper purple-dotted line).
On the daily chart, we see that on Friday, April 21, Microsoft stock finally managed to break past the $66 area and thus also past horizontal resistance. Over the past five trading days, this has now amounted to about a 5% rally, which is taking place just as Microsoft is set to report earnings on Thursday.
While anything is possible, it’s my experience that such rallies into earnings tend not to lead to sustainable rallies — even if the stock were to gap and rally higher following the earnings report.
From a trading perspective, any post-earnings rally followed by a daily close well off the intraday highs would provide an opportunity to either short MSFT stock outright or sell out-of-the-money call spreads for income. The 50-day simple moving average (yellow) would become a first downside target. That line currently hovers around the $65 mark.
Should MSFT stock gap and trade lower after earnings, you could assume a similar posture — as long as the stock closes near its daily low this Friday. But this situation would warrant a more cautious stance.
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