Shares of software giant Microsoft Corporation (NASDAQ:MSFT) fell hard this week after MSFT reported earnings that were in line with expectations, but also softness in its core software business. However, active traders and investors may be able to sink their teeth into an oversold bounce in Microsoft stock in the near-term.
After Monday’s trading, MSFT reported profits of 71 cents per share, down significantly from the $1.42 it earned in the year-ago period. Revenues, however, were up to $26.47 billion from $24.52 billion a year ago.
What seemed to spook Microsoft stock holders were the increased costs MSFT incurred in the quarter, as well as some weakness in Windows and Office sales. Microsoft still finds itself amidst a transition phase as the CEO Satya Nadella tries to push the focus further toward mobile computing.
Microsoft Stock Charts
Over the past couple years, Microsoft stock has been a great success story as it, along with others of the so-called “old tech” guard, managed to monetize better on the newer trends in tech and benefited from a PC upgrade cycle.
Looking at the multiyear weekly chart of Microsoft stock, we see that from the beginning of 2013 until November 2014, MSFT rose about 90%. Around March of 2014, Microsoft pushed past a crucial resistance area (red dotted line) that stretches back to the year 2001. Furthermore note that the V-shaped bottom in early 2009 helped form a capitulation low that ultimately also formed a massive inverse head-and-shoulders pattern that has the aforementioned red dotted line as its neckline.
Classically, Microsoft stock is at risk of retesting the previous resistance area around $38 (the dotted line). Also, with this week’s selloff, MSFT has marginally broken below its 2013 up-trending channel.
While the multimonth picture is sketchy at best, the near-term chart increasingly shows Microsoft stock as oversold and ready for an oversold bounce. After Tuesday’s gap down, the stock sold off further Wednesday, but after some morning weakness on Thursday it managed to stage a rebound and close higher by nearly 2% on the day.
My go-to near-term moving averages — namely the 8- and 21-day (blue and yellow lines, respectively) — are lagging behind MSFT, which itself fell into a support band around the $41 area. The post-earnings down-gap from this week looms large above, and while the selloff broke the near-term chart, a bounce from here stands a good chance of occurring.
Support at Thursday’s lows around $40.80 is well-defined, which traders can use as a stop-loss for a trade with an upside target toward $44.
Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!
Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
