What Microsoft’s Chart Means for the Future of AI

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Investors closely watch software and gaming behemoth Microsoft (MSFT) due to its huge size and influence.

They use MSFT to gauge not just the strength of tech stocks but the broader market as well.

And increasingly, investors look to stocks like MSFT to gauge how they’re converting the massive hype around AI into real dollars.

As we saw in MSFT’s Q4 earnings last month, AI helped its Intelligent Cloud revenue grow by 15% and contributed to MSFT beating earnings forecasts overall. But the market still wasn’t satisfied and sold MSFT down.

After dropping 15%, however, MSFT has recently turned around.

So today, I want to check in to see how that recovery is panning out…

Buying Momentum Resumes

In the chart below, you can see MSFT’s clear uptrend that began at the end of last year.

After falling almost 40% from its previous all-time high, MSFT bottomed out in November 2022 and started making a series of higher lows (and higher highs).

Microsoft (MSFT)

Source: eSignal

The first of MSFT’s higher lows came in January this year at ‘1’ on the chart. Higher lows at ‘2,’ ‘3,’ and ‘4’ followed.

MSFT’s rally also came with two other common bullish patterns.

The 10-day Moving Average (MA, red line) crossed above the longer-term 50-day MA (blue line) with both MAs steadily trending higher.

The Relative Strength Index (RSI) also tracked predominantly in the upper half of its range (above the green line). This strong momentum helped push MSFT all the way to its July 18 high at ‘A’ ($366.78). That was a massive 70%-plus gain from its November 2022 low.

Yet even before announcing its Q4 earnings, the market had already tired of MSFT’s rally. We discussed that when we looked at MSFT back in early August (red arrow).

As you can see on the chart, MSFT peaked and reversed from its new all-time high. The RSI also formed an inverse ‘V’ and tracked lower (red circle) from overbought territory.

Take another look:

Microsoft (MSFT)

Source: eSignal

The market’s disappointment in MSFT’s earnings, even though it beat forecasts, only added to its negative momentum.

The 10-day MA bearishly crossed back down below the 50-day MA – the first time it had moved there since January.

But buying momentum returned around the middle of August (orange line). And MSFT has recently tracked higher. That move has the RSI now testing resistance (green line).

And the two MAs are now converging with a crossover potentially in the cards.

So with MSFT still trying to recover from its recent trough at ‘B,’ what am I expecting from here?

Hanging in the Balance

For MSFT’s emerging up leg to develop further, it must maintain momentum.

The RSI is pressing right up against resistance, so what happens next around this level will be key.

If the RSI can continue making higher highs and gain traction in its upper band, then that will help push MSFT higher. The next test to confirm this up move will be the 10-day MA bullishly crossing back above the 50-day MA.

Beyond that, for MSFT’s longer-term uptrend to remain intact, it will need to take out its previous all-time high at ‘A.’

Yet right now MSFT’s rally is hanging in the balance…

And that’s why we need to keep watching momentum closely.

If the RSI can’t break resistance and drops lower, then MSFT’s pullback from ‘A’ has further to go.

Larry Benedict
Editor, Trading With Larry Benedict