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How to Trade Microsoft After Earnings

Microsoft is finally breaking out to new highs but it's doing so just ahead of earnings. Will the results ruin or accelerate the move?

Microsoft  (MSFT) - Get Microsoft Corporation Report was slowly creeping up to new all-time highs as it approaches its earnings report

The company will release its second-quarter earnings after the close of trading on Tuesday, For months, Microsoft stock has been quiet but investors seemingly can’t help but position themselves for a potentially bullish quarter.

Here’s the thing about Microsoft, Apple  (AAPL) - Get Apple Inc. Report, Amazon  (AMZN) - Get Inc. Report and some of the other large- and mega-cap tech names: They have been consolidating for months!

While the Nasdaq and S&P 500 have been grinding higher, it’s been sector rotation, high-growth stocks and Tesla  (TSLA) - Get Tesla Inc. Report leading the way.

By and large, Microsoft and others have been consolidating for several quarters. If we see a rotation back into this group, they could easily support the indices over the next few months while we see a dip in some of the recent winners.

Will that happen? It’s impossible to say. However, if it does, earnings may very well play a role. Let’s look at the charts.

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Trading Microsoft

Daily chart of Microsoft stock.

Daily chart of Microsoft stock.

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As it pertains to consolidation, look at the way Microsoft has traded sideways since the summer. The stock has been on a six-day win streak, but until that rally began shares were flat from the July highs.

There’s been quite a bit of chop, but the action has been healthy for investors patient enough to hold through the consolidation.

Now we’re getting a breakout. From here, the price action can be healthy on a rally or on a dip.

What I mean by that is, after such a quick rally over the last few days, it wouldn’t be unhealthy to see a shallow-post earnings dip.

Specifically, a decline to the breakout level near $228 - the 161.8% extension from the first-quarter 2020 range - and the 10-day moving average would be reasonable. It would give bulls an opportunity to buy the stock with a bit of the recent “froth” being taken out.

Then again, can we really call a six-day gain “frothy” when Microsoft has been consolidating for six months?

If we get a bullish reaction to earnings, I would love to see a move into the $250 to $255 area. That’s where Microsoft would find the two-times extension from the first-quarter 2020 range, as well as the 161.8% extension from the September pullback after the stock momentarily registered new highs.

The bottom line: Watch the $225 to $228 level on a dip. Below puts the 100-day moving average in play. On the upside, watch $250 to $255.