Charts tell tales of mystery and excitement. But to the illiterate, it all appears nonsensical, jibberish. One must be schooled in the dark arts of Technical Analysis to grasp the meaning and enjoy the adventure. Below I share the story of Microsoft from June 2019 through today.
Chapter One: Slumber (6/19 – 10/19)
Once upon a time, Microsoft was a sleepy, slow-moving tech stock. For months it meandered, content with its price. Its envy was in check, its jealousy nonexistent. It cared little that Apple was taking over the world, and its stock price was ripping. For Mister Softee had found equilibrium.
Then, a nudge occurred. The earnings fairy arrived with magic juice.
Chapter Two: Departure (10/19 – 1/20)
Slowly but surely, MSFT started to rise. Equilibrium turned to disequilibrium. Demand grew tall, supply short. Suddenly the game was afoot. Prices departed their home on the range in search of a new balance beckoning from higher levels. At first, caution ruled above all. Each step was wary. Rumors of roaming bears from the South were whispered in passing from fellow travelers.
Chapter Three: Flight (1/20 – Now)
As days turned to weeks and weeks into months, Microsoft’s caution eventually gave way to confidence. Not a single scent of bear floated by his well-trained nose, nor a single sighting. With boldness behind him, Mister Softee’s pace quickened. His walk turned a skip.
Then, another nudge arrived. Only this was more heavy-handed than the last. The earnings fairy laced his magic juice with optimism and visions of grandeur. Mister Softee downed the bottle and took flight like a bat out of Hell.
This is a neverending story! It goes on and on and on. But I didn’t bring you this far for an unsatisfying conclusion. Allow me to share how I think the story goes from here.
Microsoft Trade Ideas
Microsoft is overbought. Of that, there is no doubt. My favorite metric for measuring this is a custom one that measures how far a stock has deviated from its 50-day moving average. If you ask me kindly in the Cash Flow Club I’m teaching on Thursday, then I’ll share it with you.
At yesterday’s high MSFT was 15% above its 50-day, which is a height not reached for over three years. Historically when it gets this extended, the stock usually pauses or pulls back for a few weeks.
Additionally, implied volatility is booming with a rank of 100%. That means options are more expensive than they’ve been all year long. I want to be a seller.
As I see it, you have three choices.
One: Plug your nose and sell bull puts. Pray a large pullback doesn’t develop, and momentum continues. I don’t like this one myself. It feels like we’re chasing.
Two: Be a contrarian, don your top picking hat, and sell bear call spreads. I suspect many traders will feel icky betting against such a powerful trend.
Third: Sell an iron condor betting MSFT will settle into a range over the next few weeks, and implied volatility will retreat. This, to me, is the most interesting option.
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.