Dow component Microsoft Corporation (MSFT) is trading higher by more than 3% in Thursday's pre-market session after the software giant beat fiscal Q2 2020 profit and revenue estimates by healthy margins. Quarterly revenues rose $13.7% year over year to $36.91 billion, with impressive growth across all major product lines except for Xbox, which is scheduled to launch a new console during the 2020 holiday season. The company guided Q3 revenues in line with consensus estimates of $34.25 billion.

Microsoft stock has lifted into the third slot in Dow component performance behind Apple Inc. (AAPL) and Intel Corporation (INTC) after posting a 71% return since the last trading day of 2018. Price action has been bullet-proof since that time, breaking out above the 2018 high in March 2019 and posting a long series of new highs through the first month of 2020. Even so, emerging headwinds that include the coronavirus outbreak and 2020 presidential election could slow or stop the historic advance.

MSFT Long-Term Chart (1990 – 2020)

Long-term chart showing the share price performance of Microsoft Corporation (MSFT)
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The stock posted impressive gains throughout the 1990s, splitting seven times during an ascent that topped out near $60 in December 1999. A Justice Department anti-trust investigation ended the uptrend at that time, generating a steep decline that found support at a three-year low in the upper teens in early 2001. A successful 2002 test at that level attracted weak buying interest that faded in the upper $20s in 2005, while a 2007 breakout made limited headway, topping out in the mid-$30s in the fourth quarter of 2007.

A vertical decline through the 2008 economic collapse broke 2001 support before ending at a 10-year low in the mid-teens in March 2009. That signaled the end of the eight-year downtrend and represented a historic buying opportunity, ahead of a two-legged advance that completed a round trip into the 1999 high in the fourth quarter of 2015. It paused near that resistance level into the 2016 presidential election and broke out, entering the most prolific period since the 1990s.

Committed buying pressure dried up above $115 in October 2018, giving way to a rapid decline into a six-month low in December. The 2019 recovery wave reached 2018 resistance in the first quarter, yielding a breakout, followed by steady upside through January 2019. It has added to those gains on Thursday morning, lifting into the mid-$170s and a new all-time high. Bullish price action is currently holding its ground in the pre-market, despite a broad-based overnight sell-off.

The monthly stochastics oscillator stuck like glue to the overbought level between 2016 and the second half of 2018, highlighting extraordinary relative strength. A bearish crossover in the fourth quarter ended well before reaching the oversold zone, which hasn't been touched since 2015. Even so, the indicator has now lifted into the most extreme overbought reading since 2006, indicating that recent gains may be unsustainable.

MSFT Short-Term Chart (2017 – 2020)

Short-term chart showing the share price performance of Microsoft Corporation (MSFT)
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The on-balance volume (OBV) accumulation-distribution indicator entered a healthy accumulation phase in September 2017, with buying pressure continuing into September 2018. The subsequent distribution phase held well above prior lows, indicating garden-variety profit-taking rather than a change in the bullish long-term trend. It broke out with price in March and has posted a series of new highs since that time.

Price action between February 2018 and December 2019 hugged the underside of a rising trendline, ahead of a breakout that now places short-term support in close alignment with the 50-day exponential moving average (EMA) in the upper $150s. A pullback into that price zone may offer insight about the stock's underlying strength, with a bounce opening the door to even higher prices while a breakdown would signal the end of the current advance.  

The Bottom Line

Microsoft stock is trading at an all-time high after another strong quarter, but relative strength readings have hit extremely overbought levels, raising the odds for an intermediate correction.

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