When Microsoft peaked at 349.67 on Nov. 22, 2021, the reversal from new highs in heavy volume didn't look that nasty. And for the next six weeks, the decline did not seem too ominous. Yet a close look at the daily action in Microsoft stock hinted buyers were getting tired.
Plus, a momentum gauge, known as the relative strength index (RSI), may have helped investors decide to lock in profits after Microsoft's valiant rally from the ashes of the 2020 coronavirus bear market.
Microsoft Stock: How It Peaked In November
On Nov. 22, 2021, Microsoft stock turned a 1.9% early gain into a 1% loss by day's end. Volume was heavy but not the heaviest in months. The megacap tech dropped 9% over the next two weeks and tested its 50-day moving average.
To that point, the correction looked normal, except for the fact that from Nov. 22 to Dec. 3, six of its seven down days came in really heavy volume. Institutions clearly were selling. Plus, a new base began to form, but it never finished.
Then in early January, Microsoft fell through the 50-day moving average, and volume accelerated each day. The game was over for the stock's brilliant run.
Meanwhile, the RSI — not to be confused with IBD's Relative Strength Rating or the relative strength line — showed a curious divergence.
As the accompanying chart shows, from July to late November, the 14-day momentum indicator traded well above the neutral 50 reading. Created by J. Welles Wilder, the RSI compares the average gain during up days in a stock vs. the average decline during down days. A lot of the time, a stock shows an RSI between 40 and 60. David Keller, a chartered market technician and chief market strategist at StockCharts.com says the 50 level notes "an equilibrium between buyers and sellers."
Eye The Change In RSI Range
Keller is looking for divergence between the stock action and the RSI; that signals a potential change in overall trend is in play.
As Microsoft stock powered to new highs, the RSI jumped above 70 during multiple periods — an overbought level. A great stock can stay overbought for a long time during an upswing.
The month of December, however, showed a pivotal change.
Microsoft traded near its peak, but the RSI began etching lower highs and lower lows. Then in the first week of January, it dipped below that neutral 50 level and even cracked 40.
MarketSmith does not show the RSI. But a stochastic oscillator, another gauge of price momentum that is in MarketSmith, failed to remain in overbought range in the final week of December, right before the start of Microsoft's steep slide.
This article was originally published June 24, 2022, and has been updated. Please follow Chung on Twitter: @saitochung and @IBD_DChung
