Dow component Microsoft Corporation (MSFT) is trading within a few points of February's all-time high at $190.70 and could break out in coming weeks, entering a sustained trend advance with a measured move target above $240. It has already lifted into the second slot in Dow relative strength, just behind Apple Inc. (AAPL), highlighting continued buying interest despite the pandemic and weakening sentiment triggered by recent protests and looting.
The company benefited from a huge surge in cloud-based metrics in the first quarter as a result of mandatory stay-at-home orders, with impressive gains reported in video conferencing, gaming, and other popular applications. Heavy usage has continued in the second quarter, boding well for Microsoft's next generation of mainstream software products, including Microsoft 360 and the Windows Core operating system.
The stock held a four-year trendline during the first quarter swoon, maintaining its long-term bullish outlook despite technical damage all across the market universe. Monthly relative strength readings have now turned higher, indicating that bulls have taken control of long-term price action. However, the upside may need a bullish catalyst or improvement in broad sentiment to get investors off the sidelines and into new positions.
Despite the recovery, Microsoft could struggle with commercial product sales in coming quarters because beaten-down customers are likely to reduce information technology (IT) budgets to cope with dramatic revenue shortfalls. IT spending tends to exhibit traditional cyclical properties, with higher outlays during periods of economic expansion and lower outlays during recessions and downturns. This headwind could eventually end the developing uptrend.
MSFT Long-Term Chart (1990 – 2020)
A multi-year advance ended near $60 in December 1999, marking a high that wasn't challenged for the next 16 years, ahead of a steep downturn after the internet bubble broke in 2000. The decline stretched more than 60% into year end, while a 2001 bounce into the low $30s marked the highest high for the next six years, ahead of 2002 and 2006 tests at the 2000 low. A 2007 breakout added just three points before reversing in a downtrend that broke the 2001 low during the 2008 economic collapse.
A bounce into the new decade took four years to complete a round trip into the 2007 peak, yielding an immediate breakout that initially stalled above $50 in the fourth quarter of 2014. Bulls resumed control one year later, completing the final rally leg into the 1999 high just before the 2016 election. Price action then entered a narrow rising channel, highlighting growing institutional buying pressure after years of lagging performance.
MSFT Short-Term Outlook
The rally paused in 2018 and resumed in 2019, breaking out above the prior high at $116 in March, yielding the most prolific gains so far this century. The uptick posted an all-time high at $190.70 in February 2020 and rolled over in a vertical decline, followed by an equally vigorous bounce that stalled just three points below the prior high in May. The stock has been consolidating at that price level for the past three weeks, awaiting the catalyst needed for a breakout.
The monthly stochastic oscillator rolled over in February 2020, entering a sell cycle from the overbought level. That selling energy dried up in late March, aborting the bearish signal while generating a fresh bullish crossover. That stiff tailwind remains in force as we head through the last month of the second quarter, indicating that bulls remain firmly in charge of long-term price action, despite substantial headline risk.
The Bottom Line
Microsoft stock has returned to February resistance and could break out in coming weeks, entering a new trend advance.
Disclosure: The author held no securities in the aforementioned securities at the time of publication.