Scenario Planning after the Gap and Trap in Microsoft MSFT

Jul 22, 2013: 2:22 PM CST

Microsoft shares had been trading on a lengthy divergence ahead of last week’s down-gap action that locked in another Bull Trap at the Highs.

Let’s take a look at the current Daily and Weekly Chart of Microsoft for key price levels to watch along with possible trading opportunities that arise from these levels.

We’ll start first with the Daily Chart to get a sense of what’s happened and where we are now:

MSFT Daily Chart Gap and Trap Divergence Breakdown

We’ll start with one side of the coin, being the strength and confirmation with Price alongside Momentum and Volume at the April 13 breakout event.

We tend to look for signs of confirmation – such that Volume and Momentum rise along with price – to give us a sense that the odds favor trend continuity and thus to play the first retracement or bull flag trade that develops when a stellar rally pauses or retraces.

With the new price highs into June, we noted a visual decline in both Momentum and Volume as shares traded above the $35.00 level for the first time since the 2007 high.

It’s a caution sign, but not necessarily an outright reversal signal, when Volume and Momentum diverge (fail to confirm) a new price high.

In fact, buyers had a little more fuel in the tank to push shares up slightly above $36.00 per share but again we see a lengthy divergence into the new recovery high in July.

The outcome, as we saw last Friday, unfortunately was another Bull Trap event that collapsed the price down under the key support (and 38.2% Fibonacci Retracement from the new high) near $32.50, generating a sharp sell signal.

Price found temporary support and closed at the 50% or “halfway” retracement into $31.35 per share.

This level morphed into the current focal point or key pivot level to determine short-term bull or bear strategies.

A sudden breakdown under this level suggests price will fall towards the next lower support confluence overlapping $30.00 per share (the 200 day SMA and the 61.8% Fibonacci Line).

The Weekly Chart adds more information to the key price levels on which to focus trading strategies:

Microsoft MSFT Weekly Chart Trade Planning Trend Support Levels

Weekly Charts are often helpful for assessing the broader trend in price along with ‘obvious’ support or resistance levels in the form of simple, hand-drawn trendlines that connect prior price swing highs and lows.

The three ‘obvious’ levels on the Weekly Chart form at the following levels:

  • The $32.50 to $33.00 ‘Intermediate High’ pivot (Early 2012)
  • The $31.00 to $32.50 ‘Prior Swing High’ pivot from mid-2012
  • The $27.50 to $28.00 ‘Rising Long-Term Trendline’ pivot

Once again, the market is currently playing off the $31.50 key pivot area which represents the 50% ‘halfway’ Fibonacci Level along with the prior 2012 swing high (and just above the rising 50 week EMA at $30.70).

Again, focus “IF/THEN” short-term trading strategies relative to the movement up-away from this area (bullish for bounce/support thesis) or down-away from this area (bearish breakdown which quickly would target the $30.00 per share confluence).

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Corey Rosenbloom, CMT
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