In this week’s write up we are going to take a look at Microsoft stock, ticker $MSFT. More specifically we are going to take a look at whether the bottom is already in and, if not, where the next areas of interest lay. ⦁ Is the bottom already in? The million-dollar question we all ask […]
In this week’s write up we are going to take a look at Microsoft stock, ticker $MSFT.
More specifically we are going to take a look at whether the bottom is already in and, if not, where the next areas of interest lay.
⦁ Is the bottom already in?
The million-dollar question we all ask ourselves continuously when we are looking at charts is whether a top or bottom is in and whether it is now safe for us to enter the market.
Let us just start off by noting that MSFT has traded above the 200 EMA on the weekly timeframe since February 2013.
One of the criteria that I personally like to look for when assessing whether a particular stock can be seen as a blue-chip stock or not is if the stock is consistently trading above the weekly 200 EMA for an extended period of time, and preferably even more than a decade.
This is clearly the case for MSFT.
Of course, it is still very much possible that MSFT comes down and potentially even breaks below the weekly 200 EMA at some point in the future (it’s probably even likely that the 200 weekly EMA won’t hold at some point in time).
However, I’m personally of the opinion that for a blue-chip stock, it’s hard to go wrong with being a buyer after the price has confirmed support on this particular EMA, if you apply solid risk management.
Solid risk management to me, in this case, would mean that if I’m a buyer here for MSFT above the 200 weekly EMA (we are trading at 235$ at the time of this writing), I would look to sell my position again on a confirmed weekly candle CLOSE below the 200 EMA.
Remember that it is always possible to re-enter a position and that you potentially don’t want to hold an equity that is breaking a decade-long support line.
So, to the first question: ‘Is the bottom already in?’ we have to answer: ‘It’s impossible to know this for a certainty, but buying a blue-chip stock after it has confirmed to have found support on the weekly 200 EMA and applying solid risk management is good enough to base a trading decision on.'
⦁ What if the bottom isn’t already in?
I firmly believe that it is essential to have a trading plan in which you set up a plan for what you will do if your original position does not play out.
Start approaching trading like a game of chess. You are making a move but preparing for a potential countermove ideally already before it has been made on you.
In our example, this means that we have to prepare for at least the possibility that the bottom on MSFT is NOT in.
Using Fibonacci retracement levels tells us that if we are going to see a new low, the next 2 stops for the price to find support are 201.5$ and 187.2$.
Already knowing in advance where the price is likely going to find support after it makes a new low is an enormous edge in the market.
A possible way to play this bearish scenario is to look for a long position at 201.5, trying to catch the support above a very important psychological level and to scale out of that position at 213 - 223 and holding a portion for potentially higher targets.
A second, more defensive, way to play the scenario where the price drops below the weekly 200 EMA is to look for a long position at the 1.618 Fibonacci level, sitting at 187.2$. From there we can look to take it back to the 200$ area and then potentially also back to 213 - 223 and hold a portion for possible higher targets.
For proper risk management, I find it is crucial to always apply a proper stop loss. For the long position at 201.5, I would be getting out of position below 197 and for the more defensive long position at 187.2, a stop loss below 182.7.
If you define yourself more so as an investor rather than as a (day)trader, it is probably always a good idea to accumulate at the most defensive entries, which means that if the weekly 200 EMA breaks, 187.2$ would be your first level to accumulate more MSFT stock.
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