Microsoft Corporation (MSFT) shares closed the first half of 2019 at $133.96, which became a key input to my proprietary analytics. The only level left over from the first half is its annual value level at $92.72, which remains well below the market price. The daily chart shows a “golden cross,” and the weekly chart has been positive since the week of June 7, when the stock closed at $131.40.
Fundamentally, Microsoft is overvalued with an elevated P/E ratio of 30.39 and a dividend yield of 1.34%, 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 social media platform LinkedIn. The company reports earnings on July 18 with a winning streak of 12 consecutive quarters in beating earnings per share (EPS) estimates.
Microsoft reported strong earnings on April 24, and the stock responded by trading as high as $131.37. Shares dipped to $119.01 on June 3 and then rebounded with the market to set an all-time intraday high of $138.40 on June 24. The stock has been strong in 2019, with a gain of 34.8% year to date, and it is up a bull market 45.8% since its Dec. 26 low of $93.96.
The daily chart for Microsoft
The daily chart for Microsoft shows the formation of a “golden cross” on March 12, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. When the stock traded to its Dec. 26 low of $93.96 and closed that day at $100.56, a “key reversal” occurred, as this close was above its Dec. 24 high of $97.97.
The annual value level remains at $92.72 for all of 2019. The close of $133.96 on June 28 was input to my analytics, and new monthly, quarterly, and semiannual levels are in play. Semiannual and monthly value levels are $131.71 and $130.76, respectively, with a quarterly risky level above the chart at $144.26.
The weekly chart for Microsoft
The weekly chart for Microsoft is positive but overbought, with the stock above its five-week modified moving average of $132.48. The stock is well above its 200-week simple moving average, or “reversion to the mean,” at $80.33.
The 12 x 3 x 3 weekly slow stochastic reading is projected to end the week at 87.47, well above the overbought threshold of 80.00. If this reading rises above 90.00, the stock would be in an “inflating parabolic bubble,” which would be a warning of a potential 10% to 20% correction below the all-time high.
Trading strategy: Buy Microsoft shares on weakness to the semiannual and monthly value levels at $131.71 and $130.76, respectively, and reduce holdings on strength to the quarterly risky level at $144.26.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was also changed at the end of June.
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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an “inflating parabolic bubble,” as a bubble always pops. I also refer to a reading below 10.00 as “too cheap to ignore.”
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.