Microsoft (NASDAQ:MSFT) has been a rocket stock for years now and for 2019, MSFT stock had another vertical blastoff rally. Although the stock has pulled back a few percentage points in recent days, in my eye there is still plenty of mean-reversion, i.e., price discovery left on the downside that active investors and traders could take advantage of.
To be clear, I am not fundamentally bearish on Microsoft as a company in the long term. Rather, the trade I am setting up here on the short side is due to near-term excessively bullish exuberance.
Note also that MSFT currently is the largest holding of the Nasdaq 100, i.e., the Invesco QQQ Trust (NASDAQ:QQQ), making up about 10.52% of the QQQ ETF. This is to say that any further sideways or downward movement in MSFT will also have at least some effect on the Nasdaq 100 as a whole. If we take into account that mega-cap technology stocks like MSFT and others often have a high near-term correlation, any sideways to lower price movement in MSFT could weigh not just on the Nasdaq 100 but also on the broader stock market.
MSFT Stock Charts
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Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multi-year weekly chart, we see that the sharp year-to-date rally now has MSFT stock back up at the very upper end of the steep multi-year ascent. From a momentum perspective, the weekly MACD oscillator at the bottom of the chart is morbidly overbought.
Click to Enlarge
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that in March, Microsoft stock began a classic breakout rally to fresh all-time highs. The stock rallied right into its April earnings report and had one last gasp higher following the report. All of this took the stock from a steep slope to a parabolic rally that was simply unsustainable from a momentum perspective.
While MSFT stock has mean-reverted over the past couple of weeks and filled its post-earnings up-gap, it has still only worked its way to the lower end of the steep 2019 rally.
In my eye, Microsoft stock has lower levels to test still and here is the trade setup:
Short Microsoft stock, or buy at the money puts or put spreads using July monthly options (be sure not to hold options for longer than 2-3 weeks. They need to be rolled into September expiration after that).
The recent highs at $131 are the stop loss level and a downside profit target at $115 makes sense.
Get FREE ACCESS to Serge’s renowned Stock Market Scanner with actionable trade ideas. Get it HERE. As of this writing, he did not hold a position in any of the aforementioned securities.
