Microsoft Stock: How The RSI Momentum Tool Helped Confirm Its Top

When Microsoft (MSFT) peaked at 349.67 on Nov. 22, 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.

X

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, 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.

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, failed to remain in overbought range in the final week of December, right before the start of Microsoft stock’s steep slide.

RSI And Spotting A Positive Reversal

Meanwhile, Keller has been watching for a similar divergence in FedEx (FDX), but in the opposite direction.

From March to June FedEx has pierced 200, a key psychological price level for fund managers, no fewer than five times. At this year’s low of 192.82, the stock dropped nearly 40% from its May 2021 peak of 319.90. But the RSI hasn’t hit oversold territory — specifically, any level under 30 — since mid-March.

“FDX is at a pivotal moment,” Keller said. When a stock trades in a bearish phase, the RSI typically stays below 50, but it never gets above 60 to 70.

FedEx’s RSI on June 15 hit 61.67, one of its highest levels so far in 2022.

“From March to May, the stock went lower, but the RSI was making a series of higher lows. Can the price get past 240? You’ve got a setup now, and now you are waiting to get a trigger,” Keller added.

Please follow Chung on Twitter: @saitochung and @IBD_DChung

YOU MIGHT ALSO LIKE:

Here Are The Current Long-Term Leaders

IBD 50 Stocks To Watch

This Is Still The Golden Rule Of Investing

When To Sell Stocks: Watch For Prolonged Action Below This Key Level

Join IBD Live And Learn Top Chart Reading And Trading Techniques From Pros