Microsoft (MSFT) - Get Report is the largest corporation with a market capitalization above $1 trillion. This technology giant should be bought on weakness to its second-half value level at $131.71 down to its value level for July at $130.76. My price target for the third quarter is $144.26.
Microsoft is a growth stock that just keeps growing. The stock is not fundamentally cheap, however, as its P/E ratio is elevated at 29.70 with a puny dividend yield of 1.37%, according to Macrotrends.
The company has outperformed the market both year to date and since its Dec. 26 low of $93.96. The stock is up 33.6% year to date and in bull market territory 44.4% above the low. Microsoft has beaten earnings-per-share estimates in 12 consecutive quarters leading the stock to its all-time intraday high of $138.40 set on June 24.
The Daily Chart for Microsoft
Courtesy of Refinitiv XENITH
The daily chart for Microsoft shows the formation of a "golden cross" on March 12. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving average, indicating that higher prices lie ahead. Today the 50-day and 200-day SMAs are $129.22 and $114.62, respectively. When the stock traded to its Dec. 26 low of $93.96 and closed that day at $100.56, a "key reversal" occurred as this close was above its Dec. 24 high of $97.97. The Dec. 31 close of $101.57 was an important input to my proprietary analytics. The annual value level remains at $92.72 for all of 2019. The close of $133.96 on June 28 was input to my analytics and new weekly, monthly, quarterly and semiannual levels are in play. The weekly value level is $131.96. Semiannual and monthly value levels are $131.71 and $130.76, respectively, with a quarterly risky level above the chart at $144.26.
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 $131.14. The stock is well above its 200-week simple moving average or "reversion to the mean" at $79.86. The 12x3x3 weekly slow stochastic reading is projected to end the week at 86.25 above the overbought threshold of 80.00. If this reading rises above 90.00, the stock would be in an "inflating parabolic bubble." This is a warning of a pending 10% to 20% correction below the nearby value levels.
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.
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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 changes at the end of each month. The quarterly semiannual levels were 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.
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. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.