After a tough 2022, shareholders in Microsoft (MSFT) have had a much better time in 2023.

MSFT’s peak (and all-time high) last month represented a 67% gain from its January low. The rally added a trillion dollars to its market capitalization.

However, after hitting that high, MSFT has come under increasing pressure.

It saw a 3% reduction (rebalance) of its weighting in the Nasdaq Index. And the market had a lackluster reaction to its earnings beat last week.

In response, MSFT has retraced 10% from its high.

Now MSFT is testing a key level. And today, I want to see what’s in store from here…

Two Bullish Signals

On the left-hand side of the chart below, you can see the end of MSFT’s year-long downtrend.

That fall began in November 2021 and ended in November last year. MSFT lost around 40% in that period.

However, a common reversal pattern set up MSFT for a change of direction:

Microsoft (MSFT)

Source: eSignal

As MSFT made lower lows, the Relative Strength Index (RSI) rallied from oversold territory (see the orange lines on the left).

The rise in buying momentum halted MSFT’s fall and enabled it to rally.

However, that momentum petered out along with the rally, proving to be a false signal.

Then in early January, the RSI rallied again from oversold territory (right orange line). And MSFT’s surge got underway.

As the chart shows, that rally coincided with two major bullish signals…

1. The RSI broke through resistance (green line) and established itself in the upper half of its range. That’s where the RSI has remained for most of MSFT’s rally.

2. The shorter-term 10-day Moving Average (MA, red line) broke above the 50-day MA (blue line) in late January, where it has stayed throughout this rally.

You’ll also notice that both MAs have bullishly tracked higher…

However, after hitting its peak on July 18 (‘A’), MSFT has fallen 10% in just a couple of weeks.

That pullback started with the RSI making an inverse ‘V’ and reversing from overbought territory (upper grey dashed line).

Then the market was underwhelmed with MSFT’s Q4 earnings, despite beating analysts’ forecasts.

Take another look:

Microsoft (MSFT)

Source: eSignal

After the Nasdaq rebalance on July 24, MSFT has recently closed below its 50-day MA.

All the while, the RSI has fallen and retested support.

So what am I looking for around here?

Unable to Gain Traction

On the chart, the three red circles show where the RSI tested support throughout MSFT’s 2023 rally.

In all three cases, the RSI broke through support but failed to gain any traction in its lower band.

Instead, the RSI rebounded higher, setting off the next leg of MSFT’s rally.

For MSFT’s rally to remain intact from here, we’ll need to see a repeat of these previous patterns. The next test for MSFT would be to take out its July 18 high.

The other thing I’m watching is our two MAs. With MSFT recently closing below the 50-day MA, that is dragging the two MAs closer together.

If the 10-day MA crosses below the 50-day MA and accelerates lower – along with the RSI tracking in its lower band – MSFT’s pullback has further to play out.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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