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Technical Analysis - Microsoft



Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.


Microsoft (MSFT:NASD) has been much in the news lately owing to a combination of speculation about positive news announcements (regarding a possible dividend) as well as the fact that the stock has "finally" started to outperform the Nasdaq index.

Given the near universal belief that MSFT is about to "break out" of the near 3 ½ year trading range it has been stuck in, we thought the time was ripe to analyze the stock with the technical indicators we employ.

Net/net: the case for a sustained breakout is weak and the probability that MSFT pushes significantly beyond the $30 level remains limited. A better case can be made that the single impulse wave that started in December 1999 and ended in December 2000 has yet to resolve itself in a complete corrective move off the 1999 peak: a three-wave structure.

The most salient technical observations we can make are these: (1) the price structure from the December 2000 lows to present is highly overlapped and consistently shows a 3-wave structure in each of its legs, (2) momentum has been declining progressively since the 12/2000 lows with the MACD line asymptotically approaching the 0 line and (3) the latest momentum profile is showing lower momentum (a momentum divergence) than both previous swing peaks in September 2003 and November 2002.

These observations, along with the 2 most probable Elliott wave interpretations, suggest that the $30 level should be critical resistance. And though a move over $30 would be a surprise (owing to the most likely wave count), a move past $31.50 would be ever more improbable (owing to the second most likely wave count).

The very near term shows a clear 3 wave pattern off the lows in March, tracing out an A (3/22 lows to 4/22 high), B (4/22 high to 5/17 low), and, from that 5/17 low, a current potential C wave. Equality for the C wave (that is, where the C wave would be equal to the size of the A wave) comes between $29.10 - $29.20.

Hourly momentum is confirming the latest strength so I do not believe a top has yet been registered if our bearish interpretation is correct. Another down-up sequence into the $29-$30 area that shows hourly non-confirmation of new price highs and hourly Demark trend exhaustion indicators would be a strong signal that prices may be ready to turn.

The $29-$30 area appears to be formidable resistance that should prove difficult to pierce. A move through $30.01 would alter the technical view which would appear to suggest that a move lower from such resistance is likely. The conservative approach would suggest waiting for a confirmation of a trend change via a small degree impulse wave down from the $29-30 area before taking action.

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No positions in stocks mentioned.

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