MSFT Stock: Microsoft Stock Has Just Generated Multiple Signals

MSFT Stock: Microsoft Stock Has Just Generated Multiple Signals
iStock.com/Marco_Bonfanti

MSFT Stock: A Correction in Its Infancy

Microsoft Corporation (NASDAQ:MSFT) has been fighting neck and neck with the likes of Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN) for the title of the world’s most valuable company. This is a prestigious title to hold, but at the moment, it is masking the bigger problem happening behind the scenes, as each of these companies has seen its value peak and has begun to trend lower.

This trend began in early October 2018, when investors decided it was prudent to head for the exits, driving stocks and index values lower. The reason investors decided to head for the exits is because there are issues outstanding that need to be dealt with.

For instance, we are still in the midst of a trade war, the Fed continues to tighten, and now the government is shut down. Any one of these reasons is enough to send an investor to the sidelines, but with all three combined, it’s no wonder why the selling pressure has been so relentless.

The main problem that has risen from this relentless selling pressure is that it has caused its fair share of technical damage. Individual stocks and major market indices have begun to generate bearish signals suggesting that this correction that began in late 2018 is only in its infancy.

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Microsoft stock held up extremely well in this environment, but unfortunately, MSFT stock has now also become one of the latest victims to suffer technical damage.

The following stock chart illustrates the technical damage that Microsoft stock has suffered.

Chart courtesy of StockCharts.com

The MSFT stock chart illustrates that three separate indicators have suffered technical damage. An uptrend line, the moving average convergence/divergence (MACD) indicator, and the relative strength indicator (RSI) have all generated bearish signals.

Uptrend Line

The uptrend line is a simple metric that captures a bullish trend. This metric accomplishes this task by pinpointing where significant levels of price support reside during a bull market.

Using this tool is as simple as determining whether the stock is trading above or below the uptrend line. When the stock is trading above this metric, one can only assume that a bull market remains in development and, as a result, higher stock prices are likely to prevail over time. When a stock is trading below it, one can only assume that the bullish trend has run its course.

The uptrend line on the chart above began in June 2016. It supported Microsoft stock for 29 months as it appreciated from a low of $45.59 to a high of $115.68, representing a 153.74% return.

In November 2018, the uptrend line came under assault. By the end of December, MSFT stock closed below it. This was a bearish indication that the bullish trend that supported Microsoft stock for 29 months had run its course, opening up the door for a correction to follow.

MACD

MACD is a technical indicator that is used to figure out whether bullish or bearish momentum is influencing the price action in a stock. The reason why someone would want to know whether bullish or bearish momentum is influencing the price action in a stock is because a stock cannot sustain a directional move unless the applicable level of momentum is supporting it.

Bullish momentum paves a path of least resistance geared toward higher prices, while bearish momentum paves a path of least resistance geared toward lower prices. For instance, in June 2016, a bullish MACD signal was generated, indicating that bullish momentum was influencing the price action in Microsoft stock.

The MACD indicator remained in bullish alignment for 30 months, paving a path of least resistance geared toward higher prices, and MSFT stock appreciated, as a result.

In January 2019, a bearish MACD signal was generated, indicating that Microsoft stock is now likely to correct because momentum is now paving a path of least resistance geared toward lower Microsoft stock prices.

RSI

RSI is a technical indicator that measures whether a stock is experiencing an overbought or oversold condition. An RSI reading above 70 indicates that a stock is overbought. An RSI reading below 30 suggests a stock is oversold.

Contrary to popular belief, just because a stock is overbought or oversold does not mean it is likely to reverse. In fact, a stock can remain overbought or oversold for quite some time, and the largest moves are captured when a stock is experiencing one of these conditions.

For example, that chart above illustrates that in December 2016, MSFT stock reached an overbought condition when the RSI indicator crossed above 70. The stock remained overbought for 24 months, and during that time frame, MSFT stock continued to appreciate month over month. This is what is referred to as embedded in an overbought condition.

In November, this overbought condition was finally alleviated when RSI crossed back below 70. As a result, an RSI sell signal was generated. This RSI sell signal is suggesting that the month-over-month move toward higher MSFT stock prices has finally run its course, and a correction is now likely to follow.

Analyst Take

Not one, not two, but three signals have been generated on the Microsoft stock chart, all suggesting that the tide has shifted and that MSFT stock is now caught in the grips of a correction. These signals were generated using monthly data points and, as a result, the implications of these signals are likely to influence the stock price for many months to come.