Dow component Microsoft Corporation (MSFT) posted another all-time high last week, adding to an impressive 38% 2019 return that has left many investors stuck on the sidelines, waiting for an elusive pullback. The stock has been an incredible performer since 2016, nearly tripling in price, but it doesn't get the attention of the FAANG quintet even though it has booked greater upside than all of them except for Netflix, Inc. (NFLX)

Will the good times continue, or is Mr. Softee overbought and in need of a decline that traps late-to-the-party shareholders? The answer may lie in price action since July, which has carved a symmetrical triangle pattern, followed by a breakout last week. The stock lifted less than a point above the prior high before sellers took control, suggesting that this week's tape will tell the tale with a confirmed breakout that opens the door to the $150s or a failed breakout that signals the start of a multi-month correction

MSFT Long-Term Chart (1990 – 2019)

Long-term chart showing the share price performance of Microsoft Corporation (MSFT)
TradingView.com

The stock entered a powerful uptrend in the early 1990s, splitting seven times during an ascent that topped out near $60 at the turn of the millennium. It broke down from a small topping pattern in 2000, entering a steep decline that found support at a four-year low in the $20s in December 2001. A successful support test in the summer of 2002 completed a double bottom reversal, but the subsequent uptick failed to gain traction, stalling in the mid-$30s in 2007.

A sell-off through the 2008 economic collapse undercut the 2001 low by more than three points before bottoming out in March 2009, finally ending the nine-year downtrend, ahead of a slow-motion bounce that took nearly five years to complete a round trip into the 2007 high. The subsequent rally completed a retracement into the 1999 peak in November 2015, setting the stage for a major breakout following the 2016 presidential election.

The uptrend posted impressive gains into the October 2018 high at $116 and sold off into year end, finally bouncing in a rapid recovery wave that mounted 2018 resistance in March 2019. The stock added another 25 points into July, lifting into the fourth slot in Dow Jones Industrial Average relative performance, but it has been grinding sideways since that time, rewarding neither bulls nor bears. 

The monthly stochastics oscillator flipped into a buy cycle from the panel's midpoint in January 2019, confirming unusual strength, and has been trading in the overbought zone since May. It is showing few signs of crossing to the downside despite two months of no gains, but this is neutral positioning rather than an all-clear signal to take exposure at these lofty levels. Given the standoff, it makes sense for sidelined investors to keep their power dry for now, watching the edges of the two-month trading range.

MSFT Short-Term Chart (2018 – 2019)

Short-term chart showing the share price performance of Microsoft Corporation (MSFT)
TradingView.com

The on-balance volume (OBV) accumulation-distribution indicator has been posting new highs since lifting above the October peak in March 2019 but still hasn't reached the all-time high, posted in December 2007. The company has bought back stock at a healthy pace in the past decade, substantially reducing the outstanding float, so the apparently weak OBV number is misleading and doesn't reflect an intensely loyal institutional shareholder base.

The rally may have ended in July after mounting the 2.00 Fibonacci extension of the fourth quarter sell-off, but last week's triangle breakout tells us that bulls are in motion, hoping to clear mid-summer resistance. That question could get answered this week, with a potential rally above last week's high setting off buying signals, while a decline through the upper blue line would raise a major red flag, telling shareholders to take profits or to protect long positions.

The Bottom Line

Microsoft stock has booked excellent 2019 gains. Last week's triangle breakout could presage a new rally leg, but a pattern failure is also possible, warning potential buyers to steer clear for a few more sessions.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.