To The Moon

Here's What Microsoft's Chart Says Heading Into Earnings

$Microsoft(MSFT)$   , which will release earnings next week, is beating the S&P 500 year to date -- up 24.4% vs. about 15.7% for the $S&P 500(.SPX)$  . MSFT has also gained roughly 112% over the past three years, while the S&P 500 has added just 78.9%. What does the company's chart show us ahead of earnings?

Let's check things out:

Microsoft's Fundamental Analysis

Earnings season is about to heat up. With $Netflix (NFLX.US)$ and $Tesla (TSLA.US)$ having reported results this week, the rest of the Mag-7/FAANGs – Microsoft, $Apple (AAPL.US)$, $Amazon (AMZN.US)$, $Meta Platforms (META.US)$, and $Alphabet-A (GOOGL.US)$ – will release numbers next week.

MSFT is set to release Q3 results after the closing bell on Wednesday, with the Street looking for the software giant to report about $3.66 in GAAP earnings per share. (Analyst estimates range from $3.50 to $3.78.)

A result like that would compare nicely to the year-ago print of $3.30.

Meanwhile, analysts' consensus estimate projects that MSFT will report $75.4 billion in revenue for the period, with individual forecasts ranging from $70.1 billion to $76.6 billion.

The consensus projection would be good enough for almost 15% in year-over-year revenue growth, in line with the pace of sales gains that Microsoft has regularly produced over the past few years.

All in, 26 of the 32 sell-side analysts I know of that cover Microsoft have revised their earnings estimates higher since the quarter began, while just three have lowered their forecasts. (Three have made no changes.)

Beyond just the quarterly numbers, Microsoft CEO Satya Nadella will have a lot to talk about on the earnings call – from deals Microsoft has signed to power data centers to contracts with chip designers and LLM providers.

There's just a lot going on right now at Microsoft, from expansion of the firm's AI universe to plans to move a majority of its manufacturing out of Mainland China. A lot of what Nadella says about these things could cause a reaction in MSFT's share price.

Microsoft's Technical Analysis

Next, let's check out MSFT's chart going back some four months and running through Tuesday afternoon:

The first thing you'll see is a cup-with-handle pattern with a $531 pivot, slightly above the $524.65 that Microsoft was trading at Friday afternoon. That's a bullish signal as long MSFT can make a run at the pivot.

That's not all I see, though. Check this other four-month chart out:

This view shows a closing-pennant pattern for the stock.

Now, closing pennants historically tell you that a storm is coming, although as an indicator, they're non-directional. They signal that a violent move is on the way, but can't tell you if it's bullish or bearish.

The first chart suggests that such a move will, in fact, be bullish. But these two charts don't work together, so do we trust one or the other? That's the big question. 

In the meantime, Microsoft has been using both its 21-day Exponential Moving Average (or "EMA," marked with a green line in the first chart) and the stock's 50-day Simple Moving Average (or "SMA," denoted with a blue line) for guidance lately.

This suggests that swing traders have not exited the trade, while portfolio managers have not reduced exposure. That's typically a positive unless the stock loses those lines after next week's earnings report. If that happens, you might have a crowded move to the door. 

Separately, Microsoft's secondary technical indicators don't offer investors much help at this time.

The stock's Relative Strength Index (the gray line at both chart's tops) is almost perfectly neutral.

However, Microsoft's daily Moving Average Convergence Divergence indicator (or "MACD," marked with black and gold lines and blue bars at both charts' bottoms) is leaning bearish.

The histogram of the 9-day EMA (marked with blue bars) is negative and has been for almost two weeks. That's usually a short-term bearish sign.

Similarly, the 12-day EMA (the black line) is running below the 26-day EMA (the gold line). That's also usually bearish technically.

In fact, the only bullish thing I see in this indicator is that both the 12- and 26-day lines are still in positive territory. 

An Options Option

Options investors who want to go long on Microsoft while purchasing downside protection might employ a "buy-write" strategy in this scenario.

This involves purchasing the stock, then selling a covered call against that equity position.

This can reduce net basis (cost), but limits the potential profitability of the investor's Microsoft purchase until the call expires. And the shares could get called away if the short call is assigned.

Here's an example of a buy-write on MSFT:

-- Purchase 100 shares of MSFT at or close to the $522 the stock was trading at when I wrote this.

-- Sell (write) one Oct. 31 call with a $532.50 strike price (the above chart's pivot) for about $9.10.

Investors who want some potential downside protection might also buy a put, which can limit losses until the options trade expires. Example:

-- Buy one Oct. 31 $512.50 put for roughly $8.40.

Investors in this example will have reduced their net basis to $521.30, but will have limited their MSFT stake's potential profitability to 2.2% through the options' Oct. 31 expiration. The trade-off is that these investors will have also capped any losses at 1.7% through expiration as well.

Disclaimer: The information provided is NOT financial advice. I am not a financial adviser, accountant or the like. This information is purely from my own due diligence and an expression of my thoughts, my opinions based on my personal experiences, and the way I transact.

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