Microsoft's stock heads for a 'death cross' - but there are bigger chart problems

By Tomi Kilgore

Another drop below the 200-DMA and relative-strength breakdown are bad technical signs

A chart of Microsoft Corp.'s stock will soon flash a clearly visible bearish signal that's been in the works for the past couple months - but there are some other, more subtle technical signs that may be even more worrisome for bulls.

The first obvious problem with the software giant's (MSFT) stock chart is the looming "death cross" pattern that could appear as soon as the next couple sessions.

A death cross refers to when the 50-day moving average crosses below the 200-day moving average. It's thought to mark the spot where a shorter-term pullback graduates to a longer-term downtrend.

The 50-DMA for Microsoft's stock extended to $417.91 in Tuesday trading, according to FactSet, down from $418.17 on Monday, while the 200-DMA rose to $417, from $416.78. At those trajectories, a death cross should materialize as early as Thursday

But since these patterns are well telegraphed - Microsoft's 50-DMA had peaked in late July - and can put a pullback in historical perspective, they shouldn't be viewed as triggers to make a trade.

The last death cross appeared in mid-March 2022, after a 16% selloff in four months, and stock the fell another 45% before bottoming a year later.

But the two before that appeared either just days after or before the stock bottomed, and the 50-DMA crossed back above the 200-DMA within two months in each case.

So while a death cross would suggest the current pullback - the stock is basically trading on Tuesday where it was about seven months ago - is not like the others over the past couple years that were quickly reversed, bulls shouldn't necessarily sell just because one appears.

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There are actually a couple chart patterns that have already developed that may be cause for greater concern.

BTIG technical analyst Jonathan Krinsky said that he doesn't typically use death crosses to gauge a stock's technical health, but he does look at the moving averages that are used to define them.

For Microsoft's stock, the fact that the 50-DMA is falling, and that it's trading below the 200-DMA for the third time in as many months, "is clearly not a great sign," according to Krinsky.

More worrisome for him is how Microsoft's stock "continues to trade poorly relative to the market."

To see that relationship, chart watchers use a relative-strength chart, which compares a stock's movement with an index, like the S&P 500 SPX, rather than just tracking the stock's price.

Microsoft's stock still looks technically "OK" on a price chart, as it is trading well above the closing lows seen in August and April.

But a relative-strength basis, the stock relative to the S&P 500 has recently broken below a year-long upward channel, as well as a couple of key support levels.

And it has dropped to the lowest levels seen since August 2023.

"In absolute terms, it remains OK above $400, but the one-year relative low is not a great sign," Krinsky wrote in a recent note to clients.

Microsoft shares have dropped 11.4% over the past three months, while the S&P 500 has gained 3%.

-Tomi Kilgore

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10-08-24 1435ET

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