Microsoft Is Poised to Plummet
A large bearish engulfing candle formed on the Microsoft (MSFT) - Get Report daily chart, eclipsing nearly the entire range of last week's price action. The stock now looks poised to break below its 200-day moving average, and possibly take out a long-term support level.
The weekly chart shows the stock consolidating in a large channel from November 2015 to November 2016, and a breakout or a breakdown from the pattern projected an $8 move in price. Resolution was to the upside and the stock quickly achieved the price target and then began trading in a second channel of equal range, now using the former resistance line as support. Last week the upper end of this new pattern was tested, and the stock pulled back abruptly, returning to its 200-day moving average positioned just above channel support. Moving average convergence/divergence made a lower high in bearish divergence to price, and Chaikin money flow, which dropped to just above its centerline at the start of the first consolidation period, has remained at that level. A test of channel support seems likely and considering the technical condition of the stock, it calls into question the durability of the support line.
On the daily chart, the most recent test of the channel top formed an eveningstar pattern. This is a three-day bearish reversal pattern composed of a large white candle, followed by a narrow opening and closing range "doji" candle and completed by a large dark candle. It represents a transition in investor sentiment from bullishness to bearishness and was immediately followed by a large gap lower that broke an interior uptrend line.
Price has been attempting to stabilize around the 200-day moving average and last week was able to move back above it. It was a constructive sequence of candles, and moving average convergence/divergence made a positive crossover, and the relative strength index moved above its 21-period average.
That positive price action, however, was neutralized by the negative price action in Tuesday's session. A large bearish engulfing candle formed eclipsing the entire range of the previous week, and it indicates strong selling just above key support. Chaikin money flow is entering negative territory, confirming the stock is under distribution. A break below the 200-day moving average, at this point, could build up enough momentum to take out the channel support line, and that breakdown projects to the lower end of the original channel.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
