Microsoft Technicals Showing Bullish Pattern that Could Pull Nasdaq Upward

By Bryan McCormick

Usually I cover technical patterns into earnings news of stocks that have the potential for large-scale reactions. But today's chart of Microsoft's (MSFT) shares examines something different as there is no specific new news driving the pattern.

Instead, this pattern was triggered well after MSFT announced its earnings results on Oct. 23, a Friday, before markets opened. The stock gapped up dramatically on the news.

What happened after the gap up is what is most interesting because the stock did not continue climbing and instead declined for nearly two weeks. The drop was small, and the gap up in price was never completely closed.

Price had essentially rejoined the 10-day moving average, a dominant trendline proxy for the stock, and then climbed higher. Then on Friday, something rather interesting happened on its weekly chart.

Although the had apparently gone quiet, it was consolidating gains. This is typically how the pattern we are looking at--a bullish "flag"--is formed. It is nothing more than a series of tight-ranged lower highs and lower lows forming a counter-reaction to the prevailing trend.

This particular flag, shown in yellow on the two-year weekly chart above, formed in the three weeks since Microsoft's earnings release. It became active when price moved above the pattern, which was actually triggered on Wednesday of last week when price rose above $28.50.

This level is key as the pattern would no longer be active on a move below it. More conservative traders sometimes use the top of a pattern, in this case $29.35, as a stop.

It has an upside objective to the $32.50 to $33 area, as shown by the vertical blue line. Given the heavy weight of the stock in the Nasdaq 100, the stock would help pull that index substantially higher if it can meet this objective.

(Chart data provided by Thomson Reuters)