Microsoft Is Lagging

09/06/07 09:10:48 AM

by Arthur Hill

While the NASDAQ and QQQQ surged above their August highs, Microsoft continues to languish near its lows and a bear flag is taking shape.

Security: MSFT
Position: Sell

On the daily chart, Microsoft (MSFT) broke down with a sharp decline in July and August (Figure 1). This decline broke key support from the July lows. In addition, the stock broke both the 50-day and 200-day simple moving averages, and the 50-day moved below the 200-day recently. These breaks are bearish and broken supports turn into resistance. The 50-day, 200-day, and July lows now mark a small resistance zone around 29.5, and it would take a move above this level to rekindle the bulls.

FIGURE 1: MSFT, DAILY. Microsoft broke down with a sharp decline in July and August.

Graphic provided by: Telechart 2007.

The decline traced out a falling price channel (blue lines) and the stock broke above the upper trendline. However, this breakout occurred with a backdrop of relative weakness, and a bear flag is taking shape (magenta lines). The bottom indicator shows the price relative, which compares MSFT to QQQQ. The indicator peaked in June and declined to new lows over the last few weeks. MSFT is underperforming QQQQ, and this is negative. The rising flag is also potentially negative and a break below the late August lows would signal a continuation lower.

The weekly chart reflects more relative weakness and a double top pattern is taking shape (Figure 2). The price relative peaked in January 2007 and has been moving lower the entire year. This means MSFT has been underperforming QQQQ the whole year. Not just a few weeks or even a few months, but the whole year — over 10 months.

FIGURE 2: MSFT, WEEKLY. A double top appears to be taking shape.

Graphic provided by: Telechart 2007.

The stock met resistance around 31 in January, May, and July. The May–July peaks around 31 really form one large peak, and I am treating this as a double top in progress. The March low marks a double-top support, and a break below this level would confirm the double top. Based on traditional technical analysis this would project further weakness toward 23.

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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