Generating Income on Microsoft’s Breakout

Along with the retail sector, the tech sector has been a source of strength for the market over the last several weeks. We think this is a good time to take advantage of bullish momentum in the group by selling a put on Microsoft (NASDAQ:MSFT).

The back and forth news in trade continued with some comments from President Trump cooling expectations over the weekend. Now, China seems hung up on the U.S. removing all the tariffs on Chinese goods. However, we still think the overall trajectory is still positive, which gives tech stocks an advantage.

Low long-term interest rates also favor tech companies, which tend to have higher funding costs than traditional businesses in slower sectors.

Strong Earnings and More new Business

When it reported earnings in late October, MSFT beat expectations because demand for cloud computing grew. This showed there was still business investment happening, and it helped push the stock towards the top of its channel.

As investors find fewer growth stocks to pick from, we expect demand for tech companies able to expand market-share and margin — as MSFT has — to increase.

And this morning, MSFT announced a partnership with Allianz SE, a German financial services company, which will move pieces of Allianz’s global insurance platform to MSFT’s Azure cloud.

This announcement is obviously good news for MSFT, but it demonstrates two important things.

MSFT’s all-important cloud computing business is still growing.

MSFT can still expand its business overseas even as fears about the slowing global economy hang over the market.

Heading for $150?

From a technical perspective, MSFT finally confirmed a breakout from the channel it was in during the second and third quarter. MSFT broke above that up-trending resistance shortly after its strong earnings report, and now it has broken out of a smaller channel in the $144-$146 range.

Daily chart of Microsoft (MSFT)

Daily Chart of Microsoft Corporation (MSFT) — Chart Source: TradingView

At this point, our upside target puts the stock near $150 by the end of next month, though right now, the stock is at resistance at around $147. If it breaks above that level in the next few days, $147 could act as support going forward, making it an excellent strike price for a new put write.

Still, we don’t want to give MSFT too much time to move. There is new U.S.-China trade uncertainty entering the market, and while we think the back and forth will ultimately lead to a resolution, we don’t want to overextend ourselves. Traders should be able to get a decent premium by picking an expiration early in December.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of, as well as the co-editors of Strategic Trader.

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