Xbox excitement takes Microsoft stock to all-time high

The Dow Microsoft Corporation (MSFT) component exploded higher last week, lifting more than 15 points to a record high above $ 130. The announcement of the next generation Xbox game console supported the rally, as well as preparations for this year’s Electronic Entertainment Expo (E3). Healthy volume matched growing optimism, forecasting even higher prices in the coming months.

However, the stock is overbought in the short term after gaining 12% in five sessions, increasing the chances of a multi-week pullout to shake weak hands and consolidate impressive gains. The June 5 spread between $ 123 and $ 124 could provide a low-risk buying opportunity in this configuration, closely aligned with the 50-day Exponential Moving Average (EMA). As for the potential upside, “Mr. Softee” has been the best performing Dow component so far in 2019, and the stock could trade above $ 150 before the end of the third quarter.

The new Xbox, codenamed “Project Scarlett”, will be backward compatible, supporting 8K monitors, ray tracing graphics and SSD storage. More importantly, the system will offload many functions to the cloud, speeding up load times, frame rates and graphical displays. Advanced Micro Devices, Inc. (AMD) will supply the Navi graphics architecture and Zen 2 CPU chipsets for the new console, slated for release in late 2020.

Long term chart MSFT (1999 – 2019)

A historic advance ended at nearly $ 60 in December 1999, reversing in response to government antitrust action driven by the virtual monopoly of the Windows operating system. The stock tested new resistance in March 2000 and fell sharply when the dot-com bubble burst, dropping to its lowest level in two years in the top teenage bracket in December. A 2002 drop found support at 52 cents above the previous low, posting a double dip that gave a mediocre rise during the mid-decade bull market.

The rally ended at the .382 Fibonacci retracement of the bearish market decline in 2007, giving way to a slowdown that accelerated during the economic collapse of 2008. The stock broke support at most. 2001 low to early 2009, finally stopping in March at an 11-year low. This marked a historic buying opportunity, before a complex recovery that took nearly five years to complete a round trip to the 2007 peak.

The uptrend reached the 1999 resistance in 2016, causing an immediate breakout that posted impressive gains after the presidential election. Microsoft stock has more than doubled since then, posting higher returns than rival Apple Inc. (AAPL), and it is now trading at an all time high. Healthy volume accompanied the multi-year increase, with the balance sheet volume accumulation-distribution indicator (OBV) also close to an all-time high.

The Monthly Stochastic Oscillator hit the overbought level in October 2016 and stayed there for over two years before entering a sell cycle in the fourth quarter of 2018. It rose midway through March 2019, showing unusual strength, and returned to the overbought level once again. Given recent history at this level, market participants should not rely on the next sales cycle until it breaks above the first quarter low (red line).

MSFT Short Term Chart (2016 – 2019)

Price action since 2016 has been contained within the lower and upper trend lines (black lines) which form the outline of a massively expanding wedge pattern. The sharp rise in June has now reversed at the upper trendline level, indicating that the stock is overbought in the short term and needs a multi-week pullback or consolidation. It’s also wise to note that the rally since December has sculpted a five-wave Elliott pattern, which also predicts a pullback in the coming weeks.

The bottom line

Microsoft shares hit an all-time high earlier this week, driven by optimism over the new Xbox console and a short squeeze after fear of Mexican tariffs. While the stock is expected to trade lower in the near term, very positive technical data is supporting a possible rally above $ 150.

Disclosure: The author did not hold any position in the above titles at the time of publication.