Microsoft Corporation (MSFT) beat earnings per share (EPS) estimates when it reported results after the close on April 29. The stock rebounded and moved above its monthly pivot for May at $182.11, but it stayed shy of its all-time intraday high of $190.70 set on Feb. 11.
Microsoft stock closed Tuesday, May 12, at $182.51, up 15.7% year to date and in bull market territory at 37.7% above its March 23 low of $132.52. It is also 4.3% below its all-time high of $190.70.
Shares of Microsoft have been above a golden cross since March 15, 2019. Its weekly chart has been positive since the week of April 10. Fundamentally, Microsoft is overvalued with an elevated P/E ratio of 32.99 with a dividend yield of 1.09%, according to Macrotrends.
This tech giant offers a wide array of products and services: operating systems for PCs, servers, phones, software in the cloud, video games, and online advertising. Microsoft also owns the social media platform LinkedIn. This is a big deal, as the purchase began an EPS winning streak of 16 consecutive quarters.
The daily chart for Microsoft
Microsoft has been above a golden cross since March 15, 2019, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. This tracked the stock to its all-time intraday high of $190.70 set on Feb. 11. The stock began its decline with a price gap lower on Feb. 24.
The stock broke below its semiannual value level at $148.17 and its 200-day simple moving average at $147.48 on March 12. The annual value level at $136.42 provided a major buying opportunity on March 16 through March 23.
On the rebound, Microsoft crossed above its semiannual pivot at $148.17 on March 26. At this time, the stock was back above its 200-day simple moving average. Its quarterly pivot at $170.64 was crossed to the upside on April 14. Its monthly pivot at $182.11 has been a magnet since May 5.
The weekly chart for Microsoft
The weekly chart for Microsoft is positive, with the stock above its five-week modified moving average of $172.98. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $102.85.
The 12 x 3 x 3 weekly slow stochastic reading is projected to end the week rising to 72.52, up from 65.97 on May 8. Back at the February high, this reading was above 90.00, putting the stock in an inflating parabolic bubble formation. This was followed by a bear market decline of 30%.
Trading strategy: Buy Microsoft stock on weakness to the quarterly value level at $170.64. Reduce holdings on strength to the all-time high at $190.70.
How to use my value levels and risky levels: The closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.
The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels remain in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.