Microsoft Double Top?

06/01/07 08:36:15 AM

by Gary Grosschadl

Microsoft has hit a previous resistance level just above $31. A confluence of candlesticks, symmetry, and indicators suggests a possible early warning of potential double top on this 17-month weekly chart.

Security: MSFT
Position: Sell

A series of small bodied candlesticks at the top of any upleg suggests a tug-of-war between bulls and bears. These candles are often referred to as "spinning tops" by way of their physical appearance. This tug-of-war often points to a loss of momentum, a precursor to a downturn.

The two indicators below the chart in Figure 1 show more negative divergences to recent price action. The moving average convergence/divergence (MACD) and the relative strength index (RSI) show decreased bullishness at this second peak. When multiple negative divergences show up amid several technical indicators, a further rise in stock price becomes suspect. The stochastic oscillator reflects an overbought condition being above the 80 level, which suggests the likelihood of a coming downleg or downturn.

However, this oscillator also shows what can happen when a strong uptrend occurs looking back to the last drive north of the 50-period simple moving average. This oscillator can "stick high" — that is, it stays above the 80 level for an extended time. This is a somewhat uncommon occurrence, so this is a great example of such an event. During this stochastic event, note the strong, rising trend in the aforementioned indicators. This is not the case currently.

FIGURE 1: MSFT, WEEKLY. A double-top danger is suggested here.

Graphic provided by: StockCharts.com.

Should a double top prove to be in the making, the trendline (below $27) would have to be broken to the downside. A sustainable bounce here or above this point negates the double-top attempt. Note a potential support level at the 200-period moving average (MA) currently at $25.31. The 200-period MA in any time frame is often a trading target, so support or temporary support can come into play. Should this support level not hold, then the double-top completion target should be considered. The measured downside target for a double top is the distance from the peak to the bottom trendline, as applied to the downside break below this line. This brings the target to or near the $22 level.

In summary, this analysis hints at a potential double top for Microsoft (MSFT). A surprise move above the recent peak negates this bearish view. A bounce at or above the trendline also could turn this to a double-top test. A violation of the trendline validates the double top and brings the two lower targets into play.

Gary Grosschadl

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


Website:	www.whatsonsale.ca/financial.html
E-mail address:	gwg7@sympatico.ca

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DOUBLE TOPS

Microsoft Double Top?

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