HEAD & SHOULDERS

Is Microsoft Desperate?

05/16/11 12:45:20 PM

by Koos van der Merwe

Microsoft announced that it would acquire Skype. What's this mean for the Redmond giant?

Security: MSFT
Position: Sell

Why did Microsoft (MSFT) pay $8.5 billion for a company they didn't need? It is Microsoft's biggest-ever acquisition for a company that hasn't really made any money. Worse, Skype's previous owner, eBay, was so eager to get rid of the company, it jettisoned it, taking a loss less than two years after it bought it. Since the announcement, the share price of Microsoft has fallen, or has it simply fallen along with the market? Figure 1, however, tells a different story.

FIGURE 1: MSFT AND S&P 500, DAILY

Graphic provided by: MetaStock.

The chart shows that Microsoft topped out in January 2011 at $29.46 and then started falling while the Standard & Poor's 500 continued rising, only correcting in February 2011, almost a month later. Both bottomed in March 2011 and then rose together, but where the S&P 500 continued rising to make a new high on April 29, Microsoft started forming a head & shoulders pattern. Both indicators on the chart are related to Microsoft, and both are negative.

FIGURE 2: MSFT, DAILY

Graphic provided by: AdvancedGET.

Figure 2 shows the H&S pattern that Microsoft appears to be forming. Should the share price break below the neckline at $25.68, the share price will drop to the target of $20.24. The relative strength index (RSI) is suggesting strength, as is the falling volume as the price fell. Both suggest that the share price could find support at $24.68.

Microsoft does look weak, and the Skype deal does look like a desperate gamble by CEO Steve Ballmer as he tries to compete with Apple. I would be nervous to hold Microsoft shares at the moment but would wait to see what happens before buying.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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HEAD & SHOULDERS

Is Microsoft Desperate?

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