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.
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.
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.