Microsoft Corp (MSFT - Get Report) reports second quarter results after the close on Thursday, July 18 after setting its all-time intraday high of $139.54 on Monday, July 15. This strength is shy of its third quarter risky level at $142.56. Investors need to be aware that a close this week below last week's low of $135.37 defines a technical "key reversal."
A weekly "key reversal" occurs when a stock sets an all-time intraday high during the week then closes the week below the prior week's low.
Microsoft is the largest corporation on the planet with a market capitalization above $1 trillion. This is a growth stock that just keeps growing. The company is one of the leaders of the Dow Jones Industrial Average. The stock is up 34.2% year to date and in bull market territory 45% above its Dec. 26 low of $93.96 which was above its annual value level at $92.72.
Microsoft closed the first half of 2019 at $133.96 on June 28 which became a key input to my proprietary analytics. The value level for the second half of 2019 is $131.71. The value level for July is $130.76. The quarterly risky level at $142.56 is the upside potential on a positive reaction to earnings.
The daily chart shows a "golden cross" and the weekly chart has been positive since the week of June 7 when the stock closed at $131.40.
Fundamentally, Microsoft is overvalued with an elevated P/E ratio of 30.40 with a dividend yield of just 1.34%, according to Macrotrends. This tech giant offers a wide array of products and services: operating systems for PC's, servers, phones, software in the cloud, video games and on-line advertising. They also own social media platform LinkedIn.
Analysts expect Microsoft to report earnings of $1.21 to $1.25 when it reports earnings after closing bell on Thursday, July 18 with a winning streak of 12 consecutive quarters in beating earnings-per-share estimates. The key to this earnings report includes growth for the Azure cloud platform including its Intelligent Cloud segment. Microsoft Office 365 cloud apps is expected to show double-digit growth. The Windows subscriptions will perform with the growth in PC environment. The LinkedIn social media platform for professionals should be increasing its advertising business.
Most on Wall Street expect Microsoft to continue to beat earnings estimates as corporations spend to upgrade their IT environments. The average price target is $148 above my quarterly risky level at $142.56.
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The Daily Chart for Microsoft
Courtesy of Refinitiv XENITH
The daily chart for Microsoft shows the formation of a "golden cross" on March 12 when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. When the stock traded to its Dec. 26 low of $93.96 and closed that day at $100.56 a positive "key reversal" occurred as this close was above its Dec. 24 high of $97.97. The annual value level remains at $92.72 for all of 2019. The close of $133.96 on June 28 was input to my proprietary analytics. Semiannual and monthly value levels are $131.71 and $130.76, respectively, with a quarterly risky level above the chart at $144.26. The 50-day SMA is at $131.32 with the 200-day SMA is at $115.93.
The Weekly Chart for Microsoft
Courtesy of Refinitiv XENITH
The weekly chart for Microsoft is positive but overbought with the stock above its five-week modified moving average of $133.55. The stock is well above its 200-week simple moving average or "reversion to the mean" at $80.80. The 12x3x3 weekly slow stochastic reading is projected to end the week at 89.04 well above the overbought threshold of 80.00.
Trading Strategy: Buy weakness to the semiannual and monthly value levels at $131.71 and $130.76, respectively, and reduce holdings on strength to its quarterly risky level at $144.26. Beware of the potential weekly "key reversal" given a close this week below $135.37 which was the low for the week ended on Friday, July 12.
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How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on June 28. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.