(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Microsoft Corp. (MSFT) has risen sharply over the past 52 weeks, with a stock price that has increased by over 43 percent. But that rise could be set for a pause soon, perhaps after the company reports its financial results on February 1. An analysis of the technical trading chart suggests the stock may have gotten overextended, and could be set to fall by about 10 percent, taking it back to roughly $85.

Microsoft is expected to report that fiscal second-quarter revenue rose by about 10 percent to $28.41 billion, while earnings are expected to climb by about 3 percent to $0.86, according to YCharts. 

The year-over-year earnings growth rate is nothing to get excited about, but the company did beat first-quarter earnings estimates by nearly 16 percent when it reported 1Q results on October 26, 2017. That helped set the pace for MSFT stock's recent rise. 


But the chart may be telling more about the future direction of the stock than the earnings estimates, because expectations may have risen too high. With the stock up nearly 10 percent in 2018, it has reached overbought levels, with a relative strength index (RSI) reading of about 80. A reading over 70 is considered to be overbought. Also, despite the stock's sharp rise, the RSI peaked back in late October after the company last reported its earnings. (See also: Overbought Or Oversold? Use The Relative Strength Index To Find Out.)

A Fall To $85.50

One can argue that Microsoft's RSI is now trending lower, versus a stock that has been rising. That's a bearish divergent indication. (See also: Microsoft Sales in Russia Limited By Sanctions.)

Should the stock fall, it would likely drop back to support around $85.50 from its current price around $94, a decline of about 10 percent. $85.50 is the price where the stock peaked immediately following 1Q results, and serves as a mild support and resistance level on its rise to $95.50. 

Potential For A Steeper Decline

Should resistance at $85.50 not hold, MSFT stock could have a much sharper decline to nearly $79, filling the gap created in October 2017, after the company's first-quarter earnings release. At that price, the stock would likely run into a long-term uptrend which could serve as another level of support. 

All these ominous warning signs may prove to be nothing should Microsoft report strong 2Q earnings, which could extend the stock's bull run. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.