Short Trader: Microsoft Catalysts Fade

Editor's note: Formerly, Dan Fitzpatrick's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney and TheStreet.com readers.

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Microsoft (MSFT Quote) has been on a tear since last June, advancing about 50%. But the market typically anticipates future events, discounting them in present-day prices. That certainly seems to be the case with Microsoft.

The world had been waiting for some years for the software maker to release its new Vista operating system, and that happy day came at the end of January. I believe the recent run-up in the stock price was all about Vista, and the current price action seems to confirm that thesis. The bulls were buying the stock in anticipation of the positive buzz surrounding the release.

However, by mid-January the market was looking beyond the release of Vista to the inevitable post-Vista question: "Now what?" The financial markets are always in need of a catalyst to drive prices higher and they're looking for one at Microsoft.

I can't find it. Let's look at the chart below.

Notice how the stock had been bouncing along the 50-day moving average until last week. At that time, the bears pushed the stock below that benchmark moving average and into bear territory.

The relative strength index, or RSI, indicator is also confirming the weakness with a fall below established support. (Typically, a value of 30 or below indicates an oversold condition and a value of 70 or above indicates an overbought condition.)

A prudent short entry would be just below Wednesday's intraday low, say around $29.20. Once the trade is opened, consider putting a buy-stop up at around $30.25, just above the 50-day moving average.

I'd look for a downside target of $26. On any broad market weakness, it's certainly possible for last September's breakout level to be tested.

Microsoft (MSFT) -- Daily

Updates on Previous Picks

Endurance Specialty Holdings (ENH Quote): The cost basis of the short was $36.15, and it was closed at the open yesterday at $34.88 in anticipation of earnings, which were reported after the close.

Orbital Sciences (ORB Quote): This potential short trade has been on the Watch List, waiting for an entry trigger of $16.90. That entry was never hit, which is always a bullish indication. After all, if the bears aren't able to push a stock below support, then we know the bulls are in charge. Orbital Sciences is now off the Watch List -- there's no trade in this one.