Microsoft Is Below Its Earnings Risky Level - Here’s the Trade

Book profits on Microsoft on strength to its earnings risky level at $176.14. The downside risk is to quarterly, semiannual and annual value levels at $161.60, $148.37 and $136.42, respectively.
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Microsoft  (MSFT) - Get Report extended its earnings-per-share winning streak to 15 consecutive quarters when it reported a solid beat on Wednesday.

The stock opened Thursday and set an all-time intraday high of $174.05 with its earnings risky level at $176.14. My call is to reduce holdings on strength to $176.14. The downside risk is to quarterly, semiannual and annual value levels at $161.60, $148.37 and $136.42, respectively.

The company touted its Azure cloud business as the software giant closes the gap on Amazon’s  (AMZN) - Get Report Web Services.

In my opinion, shared by Jim Cramer of TheStreet, is that Microsoft’s purchase of LinkedIn jump-started its cloud initiatives. Here’s a link to Jim’s analysis posted on June 13, 2016.

The Azure platform began in 2008 with limited upside. The last time Microsoft missed on earnings was its release reported on April 21, 2016. The company bought LinkedIn in June 2016 and thus began the run of 15 consecutive winning quarters.

The stock is not cheap as its price-to-earnings multiple is elevated at 33.16 with a dividend yield of 1.22%, according to Macrotrends.

At Thursday's high of $174.05, the stock is up 10.4% so far in 2020 and is in bull market territory 85.2% above its Dec. 26, 2018 low of $93.96.

The Daily Chart for Microsoft

Daily Chart For Mivrosoft

Daily Chart For Mivrosoft

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. This buy signal remains in play.

The close of $157.70 on Dec. 31 was an important input to my proprietary analytics. The annual value level for 2020 is $136.42. Its semiannual value level for the first half of 2020 is $148.37. The value level for the first quarter is $161.60. A new monthly level will be available next week based upon Friday’s close. The earnings risky level will be in play next week at $176.14.

The Weekly Chart for Microsoft

Weekly Chart For Microsoft

Weekly Chart For Microsoft

Courtesy of Refinitiv XENITH

The weekly chart for Microsoft is positive but extremely overbought with the stock above its five-week modified moving average of $161.45. 

The stock is well above its 200-week simple moving average or “reversion to the mean” at $94.09.

The 12x3x3 weekly slow stochastic reading is projected to end this week at 93.76 which is well above the overbought threshold of 80.00 and well above 90.00 putting the stock in an “inflating parabolic bubble” formation which usually results in a correction of at least 10%.

Trading Strategy: Buy weakness to the quarterly, semiannual and annual value levels at $161.60, $148.37 and $136.42, respectively, and reduce holdings on strength towards the earnings risky level at $176,14.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. 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 last 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.