Technology giant Microsoft (MSFT) reported better-than-expected fiscal first-quarter 2014 earnings on Oct. 24, after the close. Earnings per share (EPS) came in at $0.62 versus the Street's estimate of $0.54 and up from $0.53 in the same quarter last year.
This growth in earnings came despite a 7% year-over-year decline in revenue from its Windows operating system. Overall, the company's revenue was up 16% from last year to $18.53 billion, beating the $17.78 billion estimated by analysts.
Furthermore, the tech firm said its devices and services business is progressing, which has been a focus for many analysts since the firm's failed attempts over the years to gain traction in the mobile computing world and its recent $7.2 billion acquisition of Nokia's handset business.
Traders seemed pleased with this news, and on Friday, MSFT rallied to the tune of 6%, bumping against its year-to-date highs. Friday's move has many technically positive implications, leading me to see this as a buying opportunity for the medium term. MSFT has a multi-year resistance level sitting immediately above, which should attract the stock in the intermediate term, and a break above it would be bullish in the longer term.
In general, the charts currently have great reference levels, particularly on the upside.
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Looking at a long-term chart, we can see that over the past nearly 14 years, MSFT has found it impossible to thrust above the $35.50 to $37.50 area on a daily closing basis. Given the stock's current proximity to this area, it is a great reference point to watch.
Depending on how technically inclined one is, the entire trade from the year 2000 to present day could be viewed as one giant inverse head-and-shoulders pattern with the neckline at the aforementioned 14-year resistance point. In other words, in the long term, if the stock rallies and holds above this level, then this could be extremely bullish.
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Moving on to the daily chart, the July highs near $36.40 are right in the middle of the long-term resistance area, and thus offer a great first upside target. With Friday's post-earnings rally, MSFT just about reached this level, which makes the upper end of the long-term resistance area at $37.50 the near-term upside target.
Also note that with Friday's rally, MSFT held its first support level around $33.50, which is a confluence area made up of the September uptrend and the 100-day simple moving average. If MSFT reverses and breaks below there in the coming days, a more bearish tone would reveal itself and could get the stock moving down toward the next support area at its 200-day simple moving average, currently around $31.60.
If and when MSFT overcomes its long-term resistance level at $37.50, it would open the stock up to a significantly higher target in the $42 area.
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From a risk management perspective, traders could take full or partial profits at the initial target and then add to the position on any dips for a shot at the secondary target.
Recommended Trade Setup:
-- Buy MSFT at $35.50 or higher
-- Set stop-loss at $34.50
-- Set initial price target at $37.50 for a potential 5.5% gain in 3-6 weeks
-- Set secondary price target at $42 for a potential 18% gain in 4-8 months