Charting Asia

Published: Tuesday, 27 Oct 2009 | 1:59 AM ET

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Its tempting to suggest that the 'V'-pattern recovery seen on the Microsoft chart reflects the behaviour of the unpopular Vista operating system and the announcement of its replacement with the newly released Windows 7.

According to technical charts, however, that's not the case.

The rebound from the lows near $15 did not coincide with the rumours of Vistas demise and replacement. The rebound reflected the normal behaviour of Microsoft.

This is not a stock that has long and stable trends. It is a stock that has extended rallies and retreats which makes it suitable for position trading. These are directional trades that may last for several weeks, or months.

Microsoft is a good trading stock so the analysis focus is on determining the potential trend turning points. The fall from $37 to $15 was the longest extended trend behaviour seen with Microsoft. But despite this the trend contained a number of strong short term rallies that had short sellers rapidly covering positions.

There are three key levels with the Microsoft chart. The first is the support level near $24. This is a  long term historical level.

The  second is the narrow consolidation band between $27 and $28. This is a powerful area. Historically it has acted as a support level and a resistance level. The dual nature of this consolidation band creates a very strong resistance level.

These strong resistance levels act as barrier to upward momentum. But paradoxically they also act as launch pads once a successful breakout is achieved. A move above $28 has an upside target of $31.50. The movement between these support, resistance and consolidation levels creates the rally and retreat behaviour that makes Microsoft a good trading stock.

The strength of the consolidation band between $27 and $28 suggests there is a high probability the price will firstly consolidate in this area, and secondly, retreat from this level and retest support at $24. Traders will be ready to exit positions and lock in profits as the downtrend develops. However they will also be ready to re-enter the trade as price rebounds from the $24 support level.

A breakout above the $27 to $28 consolidation band is a lower probability. Temporary price spikes above this level may develop. The confirmation of a breakout is when price moves above $28 and then retreats and uses $28 as a new support level. Aggressive traders will enter in these conditions for a move towards $31.50.

• Microsoft Unveils its New Retail Stores
• Why Windows 7 is So Important

New operating systems, earnings releases and other news events add a lift to price momentum but they cannot change the essential nature of the trend behaviour with Microsoft. The chart remains dominated by well established support and resistance levels so the strategy is to trade between the lines rather than hope for extended and stable trend behaviour.

Historically the bulk of trading activity has been captured between $24 and $31.50. It’s a good repeated 15% to 30% profit available to those who use rally and position trading methods. 

For traders this can be the real seventh heaven.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at . We welcome all questions, comments and requests.

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