I’m going to analyze the chart of Microsoft (MSFT) through the techniques outlined in Stan Weinstein’s book, Secrets for Profiting in Bull and Bear Markets. This is a response to a request for help in my previous post about Stan Weinstein and stage analysis. Newbee writes:
I have read the book and found it interesting and easy to understand. I’m trying to apply the concepts to real world and finding it challanging [sic]. As an example I picked MSFT stock and tried to analyze its stage formation. I looked at the chart over a 1,3, and 5 years using 200 Day MA. I’m not sure which stage it is in. It is above 200 day MA, so could be in Stage 2, but to determine that I need to find its resistance and support. But unable to determine that using the chart.
Could you guide me how to analyze it using MSFT as an example. Any help will be greatley appreciated. I think if I understand MSFT, it’ll help me to understand others.
My biggest confusion is over what period of time you should study the chart? (1, 3, or 5 years)
How to identify resistance and support to determine breakout? In MSFT case I’m trying to understand where stage 1 being formed so I can see where resistance is, so I can figure out breakout point.
Any framework looks perfect when presented on its own but the real challenge is to apply it to the real world. Weinstein’s stage analysis is simple but don’t let that fool you. It is quite good. First, let’s get a bird’s-eye view by taking a look at a long term chart of Microsoft:
This chart should drive home the well known fact that the best days of this once tech-favourite are behind it. For more than a decade it has been range-bound. Look at the decade preceding this one. It was a rocket ride! From less than $5 (split-adjusted) to more than $45 in 5 years. Sigh.
The recent bear market pushed prices well under the previous support level which had held since late 2000 at $17.50/share. Prices bounced off $15 which was support that goes back to mid to late 1997. Microsoft is now once again back at the higher end of its long term range.
Now that we have a broad context, let’s zoom in for a closer look. The charts in Weinstein’s book usually show 3-4 years worth of weekly price data. So here’s a weekly chart of Microsoft for the past 4 years:
The dark blue line is the simple 50 week moving average by the way. Weinstein uses this level of view to get a general idea of where the stock is relative to his 4 stages. He uses daily prices to fine tune entries, stop losses and profitable exits.
As Newbee suggested, Microsoft is in stage 2, which comes after basing and is indicated by rising prices and a supportive 50 week moving average that is also rising. But let’s rewind the tape and imagine that we are back at the first few months of 2009.
Microsoft, along with almost every single stock was careening down. Many stocks, including MSFT put in a sharp “V” bottom in March. Because prices headed sharply higher no real base was built. Looking on the daily chart you can convince yourself of a head and shoulder if you squint hard enough. But stage 1 was really short lived. There is no better proof of this than the sharp turn in the 50 week moving average. It went from straight down to straight up with almost no time spent going sideways.
A downward trend line from the top of the bear market provides us with another level to watch in early to mid 2009. I haven’t drawn a horizontal line at $21 because I like to keep my charts as clean and simple as possible. But if you pull up a daily chart you can see lots of good reasons for a resistance level at that price.
Interestingly enough that’s also in the vicinity of the downward resistance line I’ve drawn in from the start of the bear market. And it is also the area where price pierced the 50 week moving average, corrected (higher low) and went higher (higher high).
All this took place mostly in May 2009 and then in June 2009 Microsoft went up almost without any real pullback. So these were all good reasons to be thinking about the long side. Something else happened which should have given anyone contemplating buying a reassuring pat on the shoulder: the Coppock Curve Signaled the Start Of New Bull Market.
Also, keep in mind that Weinstein also looks at relative strength. This is a very important element of his strategy. Again, I haven’t shown it on the chart above but Microsoft was showing strength coming out of the March 2009 bottom. Another other element of this analysis is sector strength.
Weinstein believes that the market sends a message when a particular sector pulls ahead out of a base with relative strength (compared to the general market). Again, you should be able to check out the software sector easily and see the other companies in the sector and compare their charts to see if they were also exhibiting the same technical characteristics. Microsoft was rather weak when compared to its peers.
There’s more (like volume, market breadth, sentiment, etc.) but then I would just be repeating what you can readily read for yourself in Stan’s excellent book. While technically in Stage 2, current state of Microsoft is dubious as it is at an important resistance level and has already weakened. I hope this answered your questions somewhat. Let me know if this was helpful or if you have more questions by dropping me a comment below.
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