Microsoft Corporation: The Line in the Sand for MSFT Stock

 microsoft stockMSFT Stock: Getting Defensive

Microsoft Corporation (NASDAQ:MSFT) reported earnings on October 20, 2016. Following this report, Microsoft stock created a new all-time high. Its unfortunate that the share price has failed to follow through. The only good news I can offer is that the weakness in MSFT stock price is not company specific. Global indices are selling off and the weakness is broad-based as uncertainty has gripped the markets.

The market indices were making new highs in recent months, but the internals were warning that the move higher was not sustainable. I use market breadth and new highs versus new lows, and both these metrics began to deteriorate in September. October has seen these metrics weaken further. The underlying market movement was not being supported by broad-based buying.

A lot of the market weakness is being blamed on the uncertainties that are stemming from the presidential election and the looming fed interest rate hike. These events could cause dramatic shifts in economic policy that could have large impacts on the global economy and stock markets.

Uncertainty leads to selling, because anyone concerned would rather grace the sideline than get caught on the wrong side. I agree with this notion, so under such conditions I find it best to reduce my levels of risk and raise cash, looking for opportunities to nibble on positions I like while support is being tested.

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The following Microsoft stock chart illustrates the first levels of support.

msft22

Chart courtesy of StockCharts.com

The MSFT stock chart above illustrates how productive and technically abiding trading has been on Microsoft stock.  MSFT stock spent the later part of 2015 and half of 2016 trading in a range that is defined by the two purple parallel lines highlighted on the chart above. In late July, MSFT stock broke out of this range, signalling that a new trending move in price was set to begin. In the months that followed, Microsoft stock confirmed this bullish signal by rising in price and making a new high.

Current market conditions have caused the trend to stall, and although the chart remains bullish, it is wise to see where support can be found in case the selling continues.

$56.00 is the first level of support, and it represents a previous level that served as resistance. It is common for previous levels of resistance to become levels of support. A break below $56.00 would be a blow to the bulls, as this would mean that the longer term trend could be tested. The next level of support would come in at $48.00 and this level coincides with a longer term level of support.

The following Microsoft Stock chart illustrates the longer term level of support.

msft1

Chart courtesy of StockCharts.com

The Microsoft stock chart above illustrates the trend line that has supported the price since MSFT stock bottomed after the financial crisis of 2008. This trend line is a simple tool, it is a line created by connecting the troughs in the price pattern. The fact that it is simple should not be dismissed. On the contrary, this line represents everything bullish about MSFT stock. The trend identifies the most basic principle of a bull market: price begins in the lower left and moves to the upper right.

If this line breaks, I can say with confidence that the bull market in MSFT stock is over and that lower prices will prevail. This trend line represents the line in the sand: if price remains above it, the good times shall continue. Cross below it, and the party is over.

Support currently sits at around $48.00 and this level coincides with a support level that was illustrated on the first chart. If this price is tested, I believe this level will hold on the first attempt. If the market has entered into a secular bear one, the probability that this trend will hold diminishes greatly.

Bottom Line on Microsoft Corporation Stock

Market headwinds and political instability are creating macroeconomic uncertainties, which is creating selling pressures in the general market indices. Although the trend in Microsoft stock remains bullish, I would lighten up and try to reassume my position in MSFT stock as support is tested.