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OVERBOUGHT OVERSOLD


Microsoft Turns Dull After Xbox 360 Launch

12/07/05 10:04:02 AM
by Arthur Hill

Microsoft rallied in the lead up to its new Xbox 360 launch, but trading turned flat after the launch. This looks like a consolidation before a continuation higher.

Security:   MSFT
Position:   Hold

"Buy the rumor and sell the news" is an old Wall Street adage. It implies that traders and investors often buy leading up to an event and then sell when the event actually happens. This happens with earnings all the time, and it appears to have occurred with the launch of Microsoft's Xbox 360. The stock bottomed in mid-October and surged until November 18. Not coincidentally, the company launched its Xbox 360 on November 22 (blue dotted line), and trading has been flat since (Figure 1). Buying pressure dried up but selling pressure has yet to take hold, and this looks like a flat consolidation.

FIGURE 1: MICROSOFT. The stock bottomed in mid-October and surged until the company launched its highly anticipated XBox 360, at which point trading turned flat, suggesting a consolidation before a continuation higher.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
In addition to my "buy the rumor and sell the news" hypothesis, there was resistance around 28 and the relative strength index (RSI) became overbought. After such a run -- from 24.25 to 28.25 (~16%) -- profit taking is not uncommon. Microsoft (MSFT) stock was trading near the August high, and this level brought out the sellers then. In addition, the RSI moved above 70 in early August, confirming the overbought situation. Given the run up, prior high, and overbought conditions, a rest was called for.

So what now for Microsoft? The advance occurred on good volume (green oval), and the current trading range formed on lower volume. This is a good sign and indicates relatively light selling pressure. This could be just a flat consolidation or rest within the uptrend. A break above the consolidation high at 28.25 would signal a continuation higher and open the door to the low 30s. Conversely, a move below the consolidation low (27.46) would suggest at least a retracement of the prior advance, and the stock could pull back to around 26. A 50% retracement of the prior advance and support from broken resistance confirm this support zone.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Date: 12/07/05Rank: 4Comment: 
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