This year, shares of Microsoft (NASDAQ:MSFT) are still up by about 25%. Despite a recent pullback of around 6% from its highs, MSFT stock remains notably overbought in the bigger picture and I see lower prices ahead.
On May 9 I initially floated a short side trade idea in Microsoft stock, highlighting its historic overbought readings on the charts. Since then, the stock has flashed a second so-called “bearish reversal” or “buyer exhaustion” signal and that warrants an update to the trade, which is still as valid as it was in early May.
MSFT Stock Charts
For some perspective let us review the bigger picture chart, where we see that after a pullback in Q4 2018, Microsoft stock slipped into another major bullish leg, which by the second half of April brought it up to the longer-standing black line of technical resistance.
At the bottom of the chart, we note that from a momentum perspective — as represented by the MACD momentum oscillator — the stock remains historically overbought.
While any experienced market participant can tell you that overbought and oversold readings can last for quite some time before the stock price reacts, it is the rate of change to the upside over the past few months, i.e., the steepness of the slope that is most concerning to me.
To be clear, I am not calling for a collapse in the MSFT stock price, but rather for more of a “reversion to the mean,” i.e., a somewhat lower price move ahead.
On the daily chart, things get really interesting. First, note that in April, Microsoft stock rallied into its earnings report, then gapped higher following the earnings results. However, that marked a peak in the stock, which a few days later on May 1 gave us the first bearish reversal day.
MSFT stock then proceeded lower for another week or so before finding support in early May and bouncing for a few days. On May 17, the stock attempted to rally intraday, only to fail miserably and closing lower on the day. This was followed by a follow-through selling day on May 20.
All of this now marks a well-defined area of technical resistance on the chart around the $130.50 area. Any push above there would be an automatic stop loss on any swing trading shorts.
Shorting Microsoft stock makes sense around the $126-$128 area toward the first downside target at $123.50.
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