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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:
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.

E-mail address:

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