Microsoft Slides Following Bearish CPI Data: Here's The Bull, Bear Thesis

Microsoft Corporation MSFT was sliding almost 4% lower on Tuesday in sympathy with the general markets, which saw the S&P 500 gap down and plunge about 3% lower.

The sharp decline was a bearish reaction to consumer price index (CPI) data released by the U.S. Labor Department, which indicated that although inflation likely peaked in July, the inflation level hasn’t come down to where analysts estimate it should be measuring.

For the month of August, CPI reached 8.3%, down from 8.5% in July. Economists estimated CPI would come in at 8%.

The data sparked fears the central bank will raise interest rates by 0.75% when it meets later this week. After the central bank raised rates by 0.75% in both June and July, traders and investors hoped inflation would drop low enough for the Fed to begin to relax its hawkish stance.

From a technical perspective, the S&P 500 and many blue-chip stocks, including Microsoft, were in need of a pullback and as long as the S&P 500 and Microsoft don’t print lower lows this week, an uptrend that may be confirmed with the formation of a higher low.

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The Microsoft Chart: Microsoft negated its most recent downtrend on Friday when the stock printed a higher high above the Sept. 2 lower high of $260.89. Between Sept. 6 and Monday, Microsoft soared up about 5% without retracing, which indicated a pullback was likely to occur.

• The most recent low was formed on Sept. 6 at $251.94 and as long as the stock rebounds and prints a bullish reversal candlestick, such as a doji or hammer candlestick, above that level an uptrend may confirm. Bullish traders who aren’t already in a position may want to exercise patience because volatility is likely to occur into next week as the market prices in both the CPI data and the Fed’s decision on Friday.
• Bearish traders want to see Microsoft print a lower low, which could indicate the most recent spike in the stock was merely a short bull cycle in a longer-term bear market. If Microsoft closes the trading day near its low-of-day price, the stock could continue to decline on Wednesday.
• Microsoft has multiple gaps above on its chart, with the closest gap falling between $260.40 and $265.16. Gaps on charts fill about 90% of the time, which makes it likely the stock will rise up to fill the empty trading range at some point in the future.
• Microsoft has resistance above at $256.84 and $263.19 and support below at $249 and $243.