Dow component Microsoft Corporation (MSFT) outperformed its peers in 2018, posting a healthy 19% return compared to a 1% loss in the tech-heavy Nasdaq 100 Index. However, price action has deteriorated since October, dropping the software and services giant through the 200-day exponential moving average (EMA) for the first time since July 2016. It has also broken a two and a half-year trendline, raising the odds that the stock's bull market run is finally coming to an end.
It’s remarkable Microsoft stock has held up so well given red ink in FAANG stocks and other widely held tech issues. This resilience lies in Microsoft's old-school reputation and performance, posting quarter after quarter of consistent growth since breaking out above multi-decade resistance in September 2016. Unfortunately, the stock posted no major pullbacks or shakeouts during the uptrend, setting the stage for a deep correction that could trap complacent shareholders.
MSFT Long-Term Chart (1995 – 2018)
The stock split eight times during a historic 12-year ascent that ended near $60 at the turn of the millennium. It sold off when the tech bubble burst, giving up more than 60% of its value before bottoming out in the upper teens in December 2000. A 2001 bounce failed after the Sept. 11 attacks, yielding a multi-wave decline that found support just 52 cents above the prior low in July 2002.
The deep low gave way to a long period of underperformance that carved a narrow trading range in the $20s, followed by a quick burst into the $30s at the top of the mid-decade bull market in 2007. It sold off with world markets during the 2008 economic collapse, breaking the 2000 low by more than four points before bottoming out in March 2009, while a bounce into the new decade reversed in the low $30s.
It took another three years to complete a round trip into the 2010 high, ahead of a breakout that stalled near 2000 resistance in 2014. The stock finally cleared that level in the second half of 2016, entering a powerful advance that produced the most prolific gains so far this century. It recovered quickly from the early 2018 sell-off, posting a string of new highs into October's all-time high at $116.18.
The monthly stochastics oscillator crossed into the first sell cycle since 2016 in November 2018, predicting relative weakness into the second quarter of 2019. The indicator has just dropped through the panel's midpoint, suggesting that first quarter bounces will get sold aggressively. A Fibonacci grid stretched across the three-year uptrend places current action above the .382 rally retracement at $86.97, marking an initial target for the emerging downtrend.
MSFT Short-Term Chart (2017 – 2018)
The October 2018 decline broke a short-term trendline (green) going back to October 2017, yielding a six-week test at the underside of new resistance, followed by renewed downside that broke the 200-day EMA and a long-term trendline (red) in place since November 2016. The stock has now bounced to the underside of this resistance level, predicting that short sellers will reload positions between $102 and $104.
The on-balance volume (OBV) accumulation-distribution indicator fell to a nine-month low in December, signaling active but not extreme distribution. This is a two-edged sword, indicating shareholder loyalty despite a 23-point decline while revealing a large supply of potential sellers who could capitulate if the stock breaks the December low at $93.96, which is likely to happen in the coming weeks.
The 50-month EMA rising from $75 could mark an attractive downside target in the first quarter, aligning perfectly with the 50% retracement of the 2015 to 2018 uptrend. The stock hasn't broken that support level by more than a few points since 2009, offering a perfect opportunity to gauge the health of the stock's long-term uptrend. It needs to hold that level at all costs or risk further downside that reaches the upper $50s.
The Bottom Line
Microsoft stock has broken multi-year support, signaling a downtrend that could pick up steam in 2019.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.