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Tales of a Technician: Mister Softee Goes Boom

February 12, 2020

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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.

The end.

For now.

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.

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