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Microsoft In Failure Mode

02/28/07 09:43:19 AM
by Gary Grosschadl

The violation of a significant moving average line often is a tipoff to a trend change or start of a correction.

Security:   MSFT
Position:   Sell

Figure 1 shows Microsoft (MSFT) enjoyed a large upleg starting the summer of 2006, rising near 50%. Note how well the 50-day exponential moving average (EMA) carved out support. Now this support line is broken and is showing signs of switching polarity. What was support is now resistance. I call this a "failure mode," as I consider this 50-day EMA to be key resistance and rallies up to this line to be bear rallies. As long as this overhead resistance holds, I remain bearish on the stock.

Note the 200-day EMA, currently at 27.88. This could save the stock or cause a consolidation before possibly falling further. Either way, the 50-day EMA is now resistance. A bounce off the 200-day EMA may end up as another bear rally, keeping the stock in failure mode.

FIGURE 1: MSFT, DAILY. Has Microsoft topped out?
Graphic provided by:
Several indicators are worthy of note. The moving average convergence/divergence (MACD) and the relative strength index (RSI) both show major divergences to price action. As the stock was hitting a peak, these indicators failed to follow suit, hinting at a coming decline. Meanwhile, the Chaikin money flow indicator made a big shift to bearish power. When buying power dries up, bears often seize control.

Two targets are near $25 and 23.50. They represent previous levels of support that could be bounce targets. Failure there would bring a likely test of the low near $21.

Until MSFT can rise above its 50-day EMA and once again turn this moving average into support, the bears will rule the day.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

E-mail address:

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Date: 03/01/07Rank: 5Comment: 

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