NEW YORK (TheStreet) -- Toward the end of June, Microsoft's (MSFT) - Get Report chart started to develop a compression pattern, building a solid technical support level for price just above the previous resistance level.
Technical analysis should not be used as a predictive strategy, but it is useful as a tool for determining which market participants are buying or selling the stock. In this case, Microsoft clearly shows a steady buying mode and a holding pattern during the candlestick compression pattern, also there was no substantial selling at that time.
Technical patterns reveal that giant funds were buying Microsoft, well ahead of the news about the 18,000 layoffs. Microsoft needed to cut costs, and payroll is the number one business expense. Giant funds are the major investors, owning 73% of the outstanding shares at this time. They have plenty of clout in terms of what information they can demand, as long as the information is not insider trading.
The Microsoft chart below shows that giant funds were buying, then professional traders moved up the price. The long white candle is not high frequency trading action, but rather professional traders and smaller funds buying Microsoft on that day. It is well known that Dark Pools and professional traders now prefer to trade toward the end of day, due to the dominance of high frequency trading at market open.
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The final run up that formed the black candle is the day that High Frequency Traders bought this stock, due to the news release about the layoffs. In this instance, professional traders were able to front run the High Frequency Traders, and here's how they did it.
The intraday chart below is on a 3-minute time scale. It shows there is no significant high frequency trader activity on July 15 or July 16. However, on July 17, a High Frequency Trader volume surge is apparent in the first 3 minutes. The gap is also consistent with their orders filling queues prior to market open, which forces market makers to gap the price up to meet the sudden huge demand. The stock traded 11 million shares in those 3 minutes, where on the prior two days its highest 3-minute volume was only 2.1 million, with the average shares traded in 3 minutes around 150,000 shares.
After the huge volume surge of high frequency trading, the stock steadily lost intraday trading volume, causing the stock to slip-slide downward as short-term profit taking overwhelmed the smaller lot buyers. End of day on July 17 shows some buying activity in the last several minutes of the day, moving the stock up slightly.
The final run up that formed the black candle is the day that high frequency traders bought this stock, due to the news release about the layoffs. In this instance, professional traders were able to
The 5.2 million shares that traded in the first 3 minutes of July 18 is again, high frequency trading automated algorithms. However, professional traders who bought at the end of the day on July 17 sold for profit, driving price down and creating an indecision day candle in the first 3 minutes.
High frequency trading is most dominant in the first 5 minutes to 10 minutes. End of day is now dominated by dark pools who are allowed to delay their orders, as well as by professional and proprietary desk traders. These professionals use technical analysis to evaluate who is in control of price, and what technical patterns are most prevalent. They then employ tactical measures that allow them to enter against the high frequency trader orders successfully. They used the high frequency trader buy orders that occurred in the first few minutes of the trading day on Microsoft, to sell into the stock rising in price, which is an advanced technique.
High frequency trading, which takes place on the millisecond, puts the average trader at a huge disadvantage because they do not have the computing power, low latency order processing systems, or the expertise to trade against them. In addition the SEC has warned that day trading has become higher risk than it was in previous years, due to High Frequency Traders.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- MSFT's revenue growth has slightly outpaced the industry average of 10.5%. Since the same quarter one year prior, revenues rose by 15.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- MSFT's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, MSFT has a quick ratio of 2.31, which demonstrates the ability of the company to cover short-term liquidity needs.
- Compared to its closing price of one year ago, MSFT's share price has jumped by 38.92%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MSFT should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- Net operating cash flow has significantly increased by 61.17% to $9,514.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 39.30%.
- You can view the full analysis from the report here: MSFT Ratings Report