Shortly after Microsoft's powerful earnings breakout in late April, the stock began to consolidate, and this healthy process has been underway since then. This week, the stock has drifted back down to key support near the $45.50 area. If MSFT can build a base in this zone, then it could return to rally mode.
Back on April 24, Microsoft zoomed more than 10% higher on nearly four times its average volume. The powerful momentum unleashed by its third-quarter earnings report lifted the stock back up to its 2014 peak. With shares up more than 22% from their April low, the stock was overextended and unable to put in new highs. By the beginning of May, Microsoft was extremely overbought, with a MACD reading it hadn't reached since late 2007. It was becoming obvious that a significant pullback would be needed before the $50 area was clearly surpassed.
With Microsoft now testing its 200- and 50-day moving averages this week, the pullback may be entering its final stage. The support zone near these two key moving averages includes the stock's gap open print of $45.65 that began the huge April 24 ramp. MSFT is a low-risk buy between $46 and $45 as this basing process continues.
The stock has completely worked off its overbought MACD reading at this point, while selling pressure has remained well below average this month. A close below the $45 area would send a warning sign that the basing process has much more work to do, and may need to fill the third-quarter earnings gap at $43.60 before a bottom is reached. A close back above the June high at $47.75 would be a very promising signal.Click here to see the below chart in a new window.