Technical Outlook And Game Plan For Microsoft

Nov. 04, 2019 6:21 PM ETMicrosoft Corporation (MSFT)36 Comments

Summary

  • Microsoft's price is coming to an inflection point between time and price.
  • Long term, Microsoft is due for a large scale correction.
  • Short term, we could see upwards of 20% upside from current prices.
  • This idea was discussed in more depth with members of my private investing community, Tech Insider Research. Get started today »

Unlike most tech stocks, Microsoft's (NASDAQ:MSFT) stock price has over 30 years of trading action to analyze. With more data to analyze, I tend to lean heavier on Elliott Wave theory to gauge Microsoft's probable future stock price because of the many layers of wave patterns that will naturally unfold over time.

This article will outline the incredible growth in front of Microsoft, and then technical analysis to reach the conclusion that Microsoft's stock price may have some upside left in the trend, but a sharp decline is in the near future, followed by a multi-year renewed uptrend to new highs.

Microsoft's Numbers

Although various tech stocks have struggled these past few months, Microsoft has emerged to become one of the performers in the industry. In the past year alone, Microsoft's stock has soared by 27% compared to Amazon's (AMZN) 1.2%, Alphabet's (GOOG) (GOOGL) 13%, and Apple's (AAPL) 9.6%.

Microsoft's fantastic performance is due to its investment in the cloud sector. The company has embraced hybrid cloud strategy ahead of its competition, which first began to take hold back in 2018. This was two years after the company's first technical preview in 2016.

This growth continued even as the company's valuation has gotten cheaper. Microsoft had a trailing P/E ratio of 27.5, which is much lower than last year's ratio of 46, which implies that the 27% gain has been well-earned.

Moreover, in the past quarter, the company has reported great results. Its revenue of $33.72 billion beat the consensus estimates by $920 million, whereas the EPS rose to $1.37, 16 cents better than what the market had expected. In the previous quarter, Microsoft's revenue of $30.57 billion was $760 million higher than the consensus estimates. Since 2014, the company has had just one EPS miss and three revenue misses.

In the most-recent quarter, the company's growth momentum continued. Commercial cloud grew by an annualized rate of 39% while Azure grew by 64%. Dynamics 365 grew by 45% while Office 365 grew by 31%. These are excellent numbers for a company that was ignored and ridiculed by the investment community.

Presently, one of the most important aspects of Microsoft is its connection with hybrid cloud technology, which enables companies to store some of their data on their own servers while simultaneously sending other data to the private and public cloud.

Companies love hybrid cloud because it is cost-efficient, transparent, and safe. In fact, the product is used by 95% of Fortune 500 companies, and government agencies like the Department of Defense, are starting to invest in this technology.

Recently, the DoD awarded the company a software computing contract worth about $7.6 billion. The Defense Enterprise Office Solution (DEOS) will provide productivity tools to the U.S. military, and in 2018, the company won a $480 million contract to supply about 100k augmented reality devices to the U.S. military.

Finally, it's worth mentioning that the U.S. Department of Defense has partnered with Microsoft on more projects, including the multi-billion dollar JEDI project, which was just awarded to them.

Cloud and Microsoft

Microsoft offers a good indication of the cloud sector because of its broad offerings. The company has a large portfolio of cloud software (SaaS) and cloud infrastructure (IaaS) products. The IaaS and SaaS industries have grown to almost $40 billion and $95 billion in the past decade. This growth is expected to accelerate in the coming years as global corporation and governments embrace the efficiency of cloud. The industry revenue could double in the next three years, and will continue to be a heavy revenue driver for years to come.

Although there will be many winners in the cloud race, Microsoft is well-positioned because of its scale and its approach of the industry. Just this week, the company acquired Mover, a small company that will help it simplify and speed migration to Microsoft 365.

Projections for cloud growth are not in agreement with the current rotation out of cloud, however. Overall, the latest rotation is sending the wrong message as the best gains on cloud are predicted to happen over the next three years at an acceleration of 200-300% compared to the last decade (stats below).

So if other tech companies come in weak over the next year, that's a great chance to get cloud relatively cheap. Cloud has already grown 24% in the first half of 2019 with IaaS and PaaS growing at 44% and SaaS growing at 27%, according to Synergy. (Gartner is detailed in the second chart below)

Here's Gartner's take on the cloud market:

The cloud sector has had impressive growth in the past decade. This growth is just getting started. According to Gartner, cloud spending will accelerate at nearly three times the rate of the overall IT sector through 2022. The research firm expects IaaS sector to grow by 27.5% in 2019 to $38.9 billion. It is expected to reach $76.6 billion by 2022, which is an incredible growth.

Furthermore, Gartner expects other cloud sectors like Platform-as-a-Service (PAAS) and SaaS to nearly double. Another estimation is that 90% of companies will purchase these products from a single company. As a market leader, with a diverse suite of PaaS, IaaS, and SaaS products, Microsoft will likely be a potential beneficiary in the cloud cycle.

To be clear. Quarterly results will be inconsistent. It has been like this in all fast-growing sectors.

Billions of U.S. Dollars Chart

Source: Gartner

Technical Outlook - short-term to long-term

Daily Chart and Current Game Plan - Simple TA

Chart Created by Author

If we look at the daily chart of Microsoft, what's worth noting is how well Microsoft has held up as the bulk of cloud stocks are experiencing significant drawdowns. That alone is a show of short-term strength, which should be noted.

Furthermore, Microsoft is trading into an upward sloping triangle pattern, which is highlighted in blue. Price has virtually been rangebound, sloping upwards in a narrowing band. Notice how the RSI has been moving in its own triangle pattern. When I see this, it tells me that the internals, represented by the RSI, is resetting for the next move higher. The momentum is coiling, building up strength, while price is staying stable.

Seeing consolidation of both the price and RSI at all-time highs is bullish, in the near term. Today, Microsoft gaped through the upward resistance, making all new highs, which means we will likely see a continuation of the extension to new highs. It's currently hit major resistance around $146, which coincides with the Fibonacci extensions. If MSFT can break through this level, we could see a nice continuation of the current pattern.

However, if we close below the $128.5 support region, I expect the 4th wave correction to be in effect. If we break to the upside, and close above the $146.50 region, I expect the bull market in Microsoft to resume as we extend further in this 3rd Wave push.

2009 Bull Market (weekly chart of stock price) - Elliott Wave

Chart Created By Author - Above we are looking at the weekly chart of MSFT off the 2009 lows. This is my primary count for MSFT, and each count has its own internal extensions, which match the color of the count. Red indicates the extensions of the large cycle count that started 30 years ago, blue represents the primary count off the 2009 low, and the purple represents the retrace level of 3rd wave within the primary count.

If we dive deeper into Microsoft's price action on a weekly chart, we can see the uptrend from the 2009 low until now. Keep in mind, the large cycle uptrend that started from the IPO, which is highlighted in red, is composed of its own 5-wave structure (outlined below). Since 2009, we have been in the final 5th wave of the red cycle count, and that count is comprised of the 5-wave primary count, which is highlighted in blue, circled numbers, and the Purple represents the expected retrace levels of any major drawdown.

My best estimation of this primary count has us pushing to the end of a 3rd wave and with the prospect of the 4th wave correction on the horizon. Third waves are typically accompanied by peak technical and is present in the MACD, which is another indicator that we may be close to topping. Also, the 3rd wave will typically reach the 161.8% extension. In this case, we have an extremely extended 3rd wave that reached the 223.6% extension as well as the top of the trend line in blue.

I'm expecting the 4th Wave to correct to the target zone I've highlighted in the green box eventually, which is between the $120 - $92 price range. Keep in mind, the $92 price range, though may seem extreme, but it is only the 23.6% retrace level, which is typically the minimum retrace level for a 4th wave move.

It's worth noting the big picture ahead of us, and the inevitable downside we will face. However, it's also worth noting that this could take months to play out before we hit a final bottom in the 4th wave drawdown, which is why I put more stock in the daily chart's action for what to do today.

Multi-Decade Picture of Microsoft's Stock Price (monthly charts)

Charts created by author on Trading View - The red extensions are based off the length of Wave I, and then placed at the base of Wave II. The extensions are thus measurements of Wave 1 combined with the internal Fibonacci Ratios (outlined on the right of the chart).

Above is the monthly chart on Microsoft's stock price going back to its IPO. We have a massive 5-wave pattern unfolding that aligns with Fibonacci ratios. Notice how the red lines act as support, resistance zones for the monthly chart. The exact ratios we use on a daily chart are thus present on a monthly chart, and if you follow the ratio lines in red, you can easily see how the price reacts to these specific levels. It's because of this that I lean on Elliott Wave as an estimation for the overall direction of Microsoft's stock price, especially when we can analyze so many layers, and especially considering we are on the final leg of a 30 year 5-wave cycle.

Chart created by author on TradingView - The red extensions are based off the red cycle count that started at MICROSOFT's IPO. The Fibonacci circles are based off the 3rd wave high and the 4th Wave low.

Not only can we use Fibonacci ratios to estimate support and resistance zones, but we can also use the same ratios to gauge the timing of an uptrend. I only use this technique on large trends, but as you can see above, Microsoft's stock price tends to warp, bend and react to these levels, as well. In some instances, they act as strong resistance and support.

From my estimation, the price is coming to an inflection point between time and price. The price is moving closer to the 400% resistance circle in black, and is currently hovering between the 350% and 338.2% price levels in red.

I'm expecting Microsoft's stock price to make a distinct move within the coming weeks as we approach this inflection point. Either the price will turn down in a corrective fashion, or after bouncing around the resistance levels, we should see the price continue to the next level.

I show these long-term charts to provide a visual for the obvious - the good times will not last forever, and could be approaching sooner than most investors think. Calling a top or bottom is a fool's errand, and one I will never do. In the meantime, I'm long MSFT with the expressed stop, and will move that stop up as price climbs. These monthly charts offer perspective and help justify just how tight of a stop I use in current positions.

Conclusion

Cloud is priced for perfection, even after a large rotation out of the sector that is still in progress; however, cloud is set to grow for years to come. Microsoft's earnings and short-term technicals show that the price probable will extend further, extending the 3rd wave push of the primary count off the 2009 lows. If you want to play the long side, I would place a stop just under the $128.50 support region, and consider that the time to invest for the long haul is not at current prices.

This market environment is about playing momentum with tight stops. Even though the long-term analysis is showing a pullback in the future, there is still some opportunity to ride the remainder of this bull market with momentum, as Microsoft leads the way.

The big picture is to capture the final 5th Wave push after the 4th Wave correction takes place. When we bottom, Microsoft will be one of my core holdings as we get the final push of this 30-year cycle trend outlined in the monthly charts.

This quarter alone, my technical analysis on the premium site predicted Okta's pullback in Sept. (to the dollar), Roku's pullback (to the dollar) and one crypto tip to the $0.10 decimal point for a 60% gain in two weeks. I also predicted an entry for a tech stock that had over 37 hedge funds enter in the past quarter for a 10% gain in one day.

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This article was written by

Knox Ridley profile picture
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High conviction analysis to give your tech portfolio a competitive edge

Knox Ridley is the Portfolio Manager for I/O Fund with cumulative audited results of 141%, beating Ark and other leading active tech funds over four audit periods in 2020 and 2021.


Knox Ridley began consulting on portfolios in 2007 and is an experienced growth investor in both bull and bear markets, which is hard to find these days. His real-time trade notifications to premium subscribers have garnered 27 entries with over 100% gains in the last two years. Knox began his career as an ETF wholesaler in 2007 before becoming a portfolio consultant for large RIAs, FAs, and Institutional accounts. He is very keen on macro trends and is trained in Fibonacci Trading, Elliott Wave theory, as well as Gann Cycles. He also uses classical technical analysis to manage risk and identify great risk/reward setups. Knox is known for increasing and decreasing allocations for record-breaking returns.


After weathering the Great Financial Crisis, Knox is especially strong in risk management. This helps Premium Members at the I/O Fund participate in the upside of tech stocks while protecting themselves on the downside. For decades, Knox has seen the inexperienced gain large amounts and then lose large amounts. He is diligent in dedicating this time to share what he knows about risk management on the forum, through real-time trade notifications and in weekly webinars. You will not find a more grounded and accessible portfolio manager who is willing to share his daily moves as he seeks to beat Wall Street for years to come. The I/O Fund officially launched on May 8th, 2020 and his portfolio performance illustrates his ability to compete with the best Funds on Wall Street. 


Entries he has achieved on the I/O Fund premium site include Roku at $28.10 and $30, Nvidia at $31.50 and $51.20, Zoom Video at $62.40 and $73.50, Snap at $24.56, Datadog at $34.90, MRVL at $28.70, AMD at $48.40. Every entry and exit he does is logged and recorded. He even provides real-time updates on three cryptocurrencies that we believe are set to disrupt major global sectors. So far, he’s guided entries that are currently showing returns over 636%, 278%, 215%, as of 5/1/22. Here is an illustration of Knox’s trade notifications and risk management in how he approaches Bitcoin (a very volatile asset).

Disclosure: I am/we are long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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