Last month I felt Microsoft (MSFT) was getting ready to break out from its range. I noted that there was a significant point on the chart where the stock had not closed above $28.06 on a weekly basis for eight weeks between last January and mid-March. Finally, the week of March 18 (#1) saw Microsoft close above $28.06. This was a preliminary signal that the stock was in a position to challenge the top of the consolidation range – the shaded area on the chart – the high at $28.54 set on March 5.
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The stock broke out the following week (#2) and those that went long on the open the following Monday have been rewarded with a solid 5.2% gain so far this month. What made the close that week so powerful and such a safe bet was that it was not only the close for the week, but also the month and the quarter, as that was the final trading day of March. The sell stop for this trade could then simply be set as the March low of $27.52 per share.
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Technology stocks were rocked a bit with the IDC report that reported a drop of 14% in PC sales in the first quarter and explicitly mentioned Windows 8 as one of the major factors. From a trader's perspective, the drop that was a result of that report -- a week before Microsoft's earnings report -- coupled with weakness in the general market caused a significant drop in the stock's price, but it did not violate the breakout point on a weekly closing basis nor did it even come close to the sell stop.
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What it did do was create some noise on the chart that would have had day-traders scrambling.
Microsoft reported far better earnings than was expected after that IDC report and Intel's (INTC) corroborative earnings numbers. It revealed a company whose broader strategy in enterprise and cloud computing software was far stronger than unit PC sales indicated. Moreover, the company reported expanded revenues and margins associated with both Xbox and Bing. The report was impressive enough for the stock to wipe out nearly the entire drop from the previous week and close at $29.77 per share.
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Coming into the end of April for Microsoft, while there is a low-probability chance of moving back through the $30.31 high from a monthly perspective – the average difference between monthly closes is $1.54 and the stock is currently $1.90 above the March close – with more than a full week left in the month, there is a 50.6% probability of breaking back above $30.32 this week, assuming a flat open with respect to Friday's close. That would also set up a very high probability of closing above the October and November high prices, which would improve the odds of the rally continuing early in May.
The important thing to take away from this is that waiting for the right setup at the right time greatly improves your chance of the trade breaking the way that your research or due diligence tells you that it should. Moreover, the market does not reward you for being right early. By waiting until Microsoft put in a weekly close above the top of its consolidation, you leave your capital in a riskless position or available to be deployed on a different trade.