Dow component Microsoft Corporation (MSFT) is trading at an all-time high near $130 on Thursday after beating fiscal third quarter profit and revenue estimates by healthy margins. Cloud computing revenues fired on all cylinders during the quarter, up 41% year over year to $9.6 billion, fueled by rapid adaptation of cloud-based Office products. The company also reiterated fourth quarter guidance, expecting double-digit revenue growth and stable operating margins.
The stock has lifted into the fourth slot in Dow component performance, indicating broad-based institutional sponsorship, which has been a hallmark of price action for the past decade. Even so, Microsoft shares have rallied an incredible 38% since hitting an eight-month low in December and are now trading more than 20 points above the 2018 peak, raising the odds for a summer correction that tests lower price levels.
MSFT Long-Term Chart (1990 – 2019)
The stock broke out above two-year resistance at a split-adjusted 49 cents in 1990 and entered a powerful trend advance, splitting seven times into the December 1999 peak at $59.97. Allegations of monopolistic practices related to the wildly successful Windows operating system triggered a long-term top at that time, marking the highest high for the next 17 years, ahead of a steep decline when the internet bubble burst in 2000.
The sell-off ended in the upper teens in December, while a bounce into the mid-$30s stalled in June 2001, marking the highest high for the next six years. The stock underperformed badly during the mid-decade bull market, grinding sideways in a 16-point trading range before breaking out in October 2017. That uptick was short lived, reversing at $37.50 ahead of a decline that broke seven-year range support in the upper teens during the 2008 economic collapse.
March 2009's 10-year low at $14.87 marked a historic buying opportunity, ahead of a slow-motion uptick that completed a round trip into the 1999 high just before the 2016 presidential election. The stock broke out a few weeks later, posting impressive gains into October 2018's high at $116.18, and sold off into year end but held well above long-term support at the 50-month exponential moving average (EMA). That resilience set the stage for a vertical bounce and March 2019 breakout to new highs.
The monthly stochastics oscillator hasn't hit the oversold level since 2015, highlighting the powerful uptrend, and it has now reached the overbought level after a fourth quarter dip to the panel's midpoint. There's no way to tell how long this rally wave will last because the stock has been glued to this level since 2017. However, it has now rallied several standard deviations above the red trendline in place for the past three years, raising the odds for a multi-month correction.
MSFT Short-Term Chart (2018 – 2019)
The on-balance volume (OBV) accumulation-distribution indicator reached the 2014 high in the first quarter of 2018 and broke out, stalling in September 2018. It rallied above that level with price in March 2019, generating a tailwind that is underpinning the upside. However, price action has now reached within five points of a rising highs trendline going back to January 2018, highlighting the elevated risk of owning the stock at these lofty prices.
The rally has also reached the 1.618 Fibonacci extension of the 2019 recovery wave, marking a high-odds turning point. As a result, it makes sense to watch price action around $130 closely, looking for signs of aggressive profit taking that could trigger a decline into breakout support near $116. Conversely, a volume-fueled uptick through harmonic resistance may not generate a reliable buying signal, with the trendline now aligning with the 2.000 extension.
The Bottom Line
Microsoft stock is trading at an all-time high after the software giant beat earnings and revenue estimates, but it has reached harmonic resistance, raising the odds for a reversal.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.