Microsoft Corporation (NASDAQ: NASDAQ:MSFT) opened lower on Tuesday and continued to fall intraday, in sympathy with the S&P 500, which failed to gain bullish momentum when it popped over Monday’s high-of-day.
Microsoft also had an initial bullish move higher but rejected the 50-day simple moving average for the third trading day in a row, which enticed traders to sell their positions.
Regardless of the retracement, Microsoft is trading in an uptrend pattern on the daily chart. An uptrend occurs when a stock consistently makes a series of higher highs and higher lows on the chart.
The higher highs indicate the bulls are in control while the intermittent higher lows indicate consolidation periods.
Traders can use moving averages to help identify an uptrend, with rising lower time frame moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term uptrend.
Rising longer-term moving averages (such as the 200-day simple moving average) indicate a long-term uptrend.
A stock often signals when the higher high is in by printing a reversal candlestick such as a doji, bearish engulfing or hanging man candlestick. Likewise, the higher low could be signaled when a doji, morning star or hammer candlestick is printed. Moreover, the higher highs and higher lows often take place at resistance and support levels.
In an uptrend the "trend is your friend" until it’s not and in an uptrend there are ways for both bullish and bearish traders to participate in the stock:
- Bullish traders who are already holding a position in a stock can feel confident the uptrend will continue unless the stock makes a lower low. Traders looking to take a position in a stock trading in an uptrend can usually find the safest entry on the higher low.
- Bearish traders can enter the trade on the higher high and exit on the pullback. These traders can also enter when the uptrend breaks and the stock makes a lower low indicating a reversal into a downtrend may be in the cards.
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The Microsoft Chart: Microsoft’s uptrend began on June 14, when the stock formed a bullish double bottom pattern at the $241.53 level, when paired with similar price action the trading day prior. The stock’s most recent higher low within the uptrend was printed on June 22 at $250.37 and the most recent higher high was formed at the $268.30 mark on Monday.
- While Microsoft could fall about 4.5% lower before negating its current uptrend, bullish traders should note that they are in an official bear market, where bullish cycles occur but are usually short-lived. Microsoft’s last bull cycle took place between May 20 and June 1, before the stock dropped over 13% lower over the eight trading days that followed.
- The good news for the bulls is that Tuesday’s retracement was taking place on lower-than-average volume, which indicates consolidation as opposed to fear selling. At press time, about 5 million shares of Microsoft had exchanged hands compared to the 10-day average of 32.41 million. If Microsoft continues to trade lower, bullish traders will want to see the volume continue to decline while bearish traders will want to see a marked acceleration in selling pressure.
- There is a gap below on Microsoft’s chart, which the stock was attempting to fill on Tuesday. The gap exists between $259.37 and $261.57 and because there’s a 90% chance the empty trading range fills, bullish traders can watch for a reversal to begin if the stock trades down to the lower range of the area.
- Microsoft has resistance above at $263.19 and $271.36 and support below at $256.84 and $249.
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