Charles Dow, known as the “Father of Technical Analysis,” made significant contributions to how investors interpret market movements with his early 20th-century work. Dow focused on price trends, examining swing highs and swing lows to define and track trends over time.
Upon initial examination, Microsoft’s (MSFT) stock chart appears to indicate a consistent uptrend characterized by higher highs and higher lows. However, while this short-term uptrend is noteworthy, it could also signify the formation of a “bear flag” pattern—a precursor to a potential major downward trend. A bear flag pattern manifests following an initial downtrend, evidenced here by a drop from $470 to $385 between early July and early August of this year. Subsequently, a short-term uptrend channel emerged, defined by the highs and lows in August and September.
September has been relatively favorable for MSFT, with a gain of approximately 5% from the end of August. The swing lows of August and September align closely with the 200-day moving average, reinforcing a short-term bullish perspective.
While the short-term trend remains positive, there is a risk that Microsoft could swing lower, potentially confirming a bear flag pattern, indicative of a broader decline. If MSFT falls below $410 in the coming weeks, this would complete the bear flag pattern and push the price below the 200-day moving average. It would also suggest a minimum downside objective of approximately $370, representing a 61.8% retracement of the rally from October 2023 to July 2024.
Seasonally, September often exhibits weakness, which could set MSFT up for a typical Q4 rally and year-end strength. Despite still demonstrating overall strength, Microsoft’s charts are beginning to show indicators of potential weakness typical in previous bearish rotations.
One of the significant advantages of technical analysis is its ability to establish “if-then” statements. This approach aids investors in managing risk while identifying potential opportunities.
The opinions expressed in the analysis are those of the contributor and do not reflect the views of CNBC, NBC UNIVERSAL, or their affiliates. The content is for informational purposes only and does not constitute financial, investment, tax, or legal advice. It is general in nature and may not be suitable for individual circumstances. Individuals should consider seeking advice from their financial or investment advisor before making financial decisions.
