Microsoft Is a Microcosm of the Slip-Sliding Tech Sector

If anyone has a finger on the pulse of the tech economy, it’s Microsoft (MSFT) CEO Satya Nadella. Since he stepped in for predecessor Steve Ballmer in February 2014, shares of Microsoft have climbed nearly 600%. That impressive figure was achieved despite last year’s decline of 28.7%.

Nadella made some rather jarring comments this week, and I’m surprised they’ve drawn little attention here in the U.S. Nadella is bullish on the tech sector in the long term, but in the short run, he seems very cautious.

“I’d say the next two years are probably going to be the most challenging,” Nadella said in an interview with CNBC. “We did have a lot of acceleration during the pandemic, and there’s some amount of normalization of that demand. The combination of pull-forward and recession means we’ll have to adjust.”

Nadella wasn’t only speaking of Microsoft, but of the tech sector as a whole. He did predict that a “massive growth cycle” would occur after a two-year malaise, but that’s cold comfort for investors who are concerned about the here and now.

On Thursday, Microsoft fell 2.9% on above-average volume (shaded yellow). The stock closed at $222, just eight points above its multi-year low of $214 (point A).

Microsoft has fallen 7.3% this week. As we mentioned earlier this week, Microsoft is not a buy at current levels.

Chart Source: TradeStation

Where will Microsoft finally find its footing? To answer that, we’ll need to go to the weekly chart.

On this time frame, we see Microsoft testing its 200-week (not day) moving average (red). If that indicator breaks, we could see the software giant fall all the way to the pandemic lows, in the mid $130 area (arrow). Note the heavy volume reversal that occurred in this area in early 2020 (shaded yellow).

Chart Source: TradeStation

The problem with Microsoft and many other tech names is that they ran far and fast after the formation of the pandemic bottom in early 2020. The amount of stimulus that was unleashed at that time helped fuel massive moves in stocks, crypto and real estate.

When stocks move up quickly, fewer support and resistance levels are created. Because of this, a sharp and rapid rise can lead to a proportionate fall.

Microsoft is not the only stock affected by this phenomenon. Names such as Alphabet (GOOGL) , Tesla (TSLA) and Nvidia (NVDA) all rocketed from their pandemic lows, leaving little to prevent them from falling back to those levels. If Satya Nadella is correct about the next two years being “challenging,” a return to those levels is not out of the question. 

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