Yesterday was a messy day for investors… which may be surprising given that the S&P 500 rose 1.2% and the Nasdaq rose 0.8%.
In the morning, we got the consumer price index (CPI) reading for May.
It showed prices rose by 3.3% compared with a year ago. That was lower than the 3.4% forecasted by economists.
Of greater note was the month-over-month reading of 0%. Collectively, prices didn’t budge from April to May.
Then, in the afternoon, the Federal Reserve held interest rates steady – and published an updated forecast of where it expects rates to be by the end of the year.
It’s now forecasting only one cut in 2024. But it raised its forecast to four cuts in 2025. (Previously it expected three.)
In his press conference, Fed Chair Jerome Powell reiterated that the Fed’s “restrictive stance” of monetary policy will continue to reduce inflationary pressures.
So to sum up, inflation is beginning to cool off once again… But the Fed is choosing to take a more hawkish stance than before.
But what’s most interesting is how the market reacted…
On any other day when the Fed moved the punch bowl away from partygoers, the markets would have plummeted.
That’s not what happened. The market clearly understood that these forecasts are ever-changing these days.
And rate cut uncertainty isn’t slowing anything down…
Many stocks have seen breakouts lately. The path of least resistance is higher.
And there’s one stock in particular that has caught my eye…
The Beginning of a Move Higher
A huge name in tech – the world’s second largest company in terms of market cap – is beginning to break out of a monthslong consolidation.
I’m referring to Microsoft (MSFT). As it stands today, this could be the start of a stronger move higher in the stock.
Take a look at the chart of MSFT over the past year:
MSFT experienced a 48% rise through the first five months of 2023.
But from June to October 2023, shares essentially went nowhere.
Then in November, MSFT broke out of that consolidation. It rose an additional 17% before entering another consolidation in April 2024.
Now we’re beginning to see the signs of another breakout taking shape.
As you can see in the chart, Microsoft has struggled to cross above $430 for the past three months (purple line).
But it has clearly jumped higher, breaking through that resistance line.
And two indicators suggest this breakout could lead to more gains over the next few weeks.
The first is in the moving average convergence/divergence (MACD) in the middle of the chart.
The MACD line is a momentum indicator. When it crosses above the orange signal line, it’s considered a bullish signal.
That’s even stronger due to its position well above the zero line, which confirms the stock is in an upward trend.
The second indicator to watch is the Relative Strength Index (RSI) at the bottom of the chart.
The RSI is another momentum indicator that measures the speed and strength of price movements.
When the RSI rises above 70, it signals that the stock may be overbought, and a price correction could be imminent.
When the RSI is below 30, it signals that the stock may be oversold, and that a price increase could be coming.
Microsoft’s RSI is currently 66, which means it’s in a sweet spot – above 50 but not yet overbought.
Take another look:
So the momentum trend is strong but not yet at a point where it’s on the cusp of a pullback.
Both of these indicators paint the picture of a stock whose momentum can continue to propel it higher.
Putting the Pieces Together
When we study Microsoft’s chart, we can begin to put the pieces together to estimate how much higher the stock can go from here.
In the past, we can see two instances where Microsoft’s RSI rose into the high 60s and made its way to overbought levels. During those moments, it produced an average rise of 8.5% over the following three weeks.
And let’s consider Microsoft’s gains following previous breakouts from consolidated patterns. Given that prior action, MSFT could experience a potential rise of 34% over the following three months.
Now, there’s no guarantee MSFT will perform the same this time.
But these indicators are a good place to start when planning a potential tech trade to profit from what could be a sharp rise over the next few weeks.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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Hello, I’ve been trading with you for 9 months now, and I really enjoy it!
On the USO 7/19/24 call, I bought 4 contracts at $2.80, so I made around 45% in the two days! Not bad at all! Keep the wins coming!!
Thank you.
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I didn’t see your advice Thursday-Friday. Instead sold today for a 42.9% gain. Now wish I’d bought some more. Looking forward to more of these sorts of deals.
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