Like the rest of Big Tech, Microsoft (MSFT) had a tough time last year.
By the time MSFT bottomed out in November, it had lost close to 40% following its all-time high just 12 months earlier.
A promising rally emerged after hitting those lows, but it ended when MSFT reversed sharply.
After a more promising start in 2023, MSFT has worked its way higher. This has been fuelled in part by its investment in burgeoning AI software ChatGPT.
But the market is especially volatile right now, so investors need to stay vigilant for any pullbacks.
Recently, MSFT reversed off a key level. So today we’ll see how we can trade it from here…
A Changing Profile
The chart below shows MSFT’s clear downtrend through November 2022.
MSFT made a series of lower highs at ‘A’ and ‘B.’ And the longer-term 50-day moving average (MA – blue line) trended lower…
Microsoft (MSFT)
Source: eSignal
After hitting those peaks, the next downturns coincided with two key bearish signals…
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The Relative Strength Index (RSI) fell below support (green line) and remained stuck in the lower half of its range.
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The shorter-term 10-day MA (red line) crossed below the 50-day MA.
But after bottoming out in November, MSFT’s profile began to steadily climb within a defined range (dark blue lines).
After its November rally petered out and reversed in December, MSFT made a higher low at ‘1’ (bottom of the range).
Similarly, the RSI formed a ‘V’ and rallied from near oversold territory (lower grey dashed line).
From there, MSFT began to rally higher as the RSI broke up through support and gained traction in its upper band.
And the 10-day MA added to the bullish sentiment by breaking back above the 50-day MA.
Take another look at the chart…
Microsoft (MSFT)
Source: eSignal
Yet, when we looked at MSFT back on February 22 (red arrow), that buying momentum had put MSFT at the top of its trading range into overbought territory.
Then the RSI trended lower (orange line), which pulled MSFT down.
For MSFT’s rally to resume, we knew the RSI needed to hold support and remain in the upper half of its range.
And as you can see, that’s exactly how it played out…
After tracking closely along support, the RSI rallied again, sending MSFT up to a seven-month high.
But that move put the RSI in overbought territory (red circle) again.
So with MSFT recently retracing from its upper range, what can we expect from here?
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This Support Level Is Key
If the RSI continues to retrace lower, then MSFT will follow it down.
And if the RSI tracks back at support, we could see MSFT trade around the $260-265 level.
What happens around this support level will be key…
If the RSI holds support and rallies (as it did earlier this month), then we could see MSFT try to rally to a fresh high.
However, if the RSI continues to fall and gets stuck in its lower band, then MSFT’s fall could accelerate.
The 10-day MA crossing back below the 50-day MA could then see MSFT trade near its lower trading range around $245.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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