Microsoft Is an Opportunity for Investors – Here’s the Trade

Shares of Microsoft are in bull-market territory - and they still present an opportunity for investors. Here's the trade.
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Microsoft's  (MSFT) - Get Report streak of beating earnings estimates has stretched to 15 quarters, and as strong as the stock has been, it still presents an opportunity for investors. 

The stock traded as low as $132.52 on March 23, then quickly stabilized as its annual and semiannual pivots at $136.42 and $148.37 provided upside magnets.

The stock climbed out of bear-market territory but remains in correction territory 16% below its Feb. 11 high of $190.70. 

At the same time, shares of the Redmond, Wash., software and cloud services giant are now in bull-market territory 21% above their March 23 low.

Why own Microsoft? Here's why.

Its Azure cloud business is closing the gap on Amazon’s  (AMZN) - Get Report Web Services.

Microsoft’s purchase of LinkedIn jump-started its cloud initiatives. The company bought LinkedIn in June 2016 and began the run of 15 consecutive winning quarters.

Covid-19 has led to a surge in cloud-based meetings, particularly in Italy.

Today Microsoft announced new software for household use. Microsoft 365 Personal will cost $9.99 per month and will be available on April 21.

The stock is not cheap as its p/e multiple is 27.7 with a dividend yield of 1.36%, according to Macrotrends.

Microsoft is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MSFT? Learn more

The Daily Chart for Microsoft

Daily Chart For Microsoft

Daily Chart For Microsoft

Courtesy of Refinitiv XENITH

The daily chart for Microsoft shows momentum accelerating up to its all-time high of $190.70, set on Feb. 11. 

The gaps higher on Oct. 24 and Jan. 30 were caused by positive reactions to the previous two earnings report.

The stock then cascaded lower with the market. On March 12 the stock tested its semiannual value level at $148.37, which was a magnet through March 25.

The stock tested its annual value level at $136.42 between March 16 and March 23 as a buying opportunity.

The 200-day simple moving average at $148.77 lines up with the semiannual pivot at $148.37. As soon as these levels were penetrated and held, the upside momentum returned.

The stock moved above its weekly pivot at $155.77 on Monday and nearly tested its 50-day simple moving average at today’s morning high of $164.78.

Tomorrow we will have new quarterly and monthly levels for the second quarter and April. These will likely define new upside targets. 

The first-quarter pivot was crossed today at $161.60, with March’s risky level at $168.23.

The Weekly Chart for Microsoft

Weekly Chart For Microsoft

Weekly Chart For Microsoft

Courtesy of Refinitiv XENITH

The weekly chart for Microsoft ended last week negative but will be upgraded this week given a close on Friday above its five-week modified moving average of $159.27. 

The stock is well above its 200-week simple moving average, or reversion to the mean, at $99.14.

The 12x3x3 weekly slow stochastic reading is projected to slip to 34.79 this week from 37.73 on March 27.

At the high this reading was above 90, which put the stock in an inflating parabolic bubble formation. That resulted in the bear-market correction.

Trading Strategy: Buy weakness to this week’s value level at $155.77 and reduce holdings on strength to its monthly risky level at $168.23.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Second-quarter 2020 and monthly levels for April will be established based upon the March 31 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

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.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.