Chart of the week: A window on Microsoft

 A window on Microsoft

Today, I am veering slightly off-piste. Up till now, I have focused on components of the FTSE 100 because I believe these UK shares are the most interesting to most readers. But as you know, there is whole world of equities out there and, provided they are large-caps, I can consider them for analysis using my tramline trading methods.

Also, I do know that UK investors are not shy of investing or trading in overseas equities. That certainly was not the case a few years ago. But now, with modern trading platforms, there is a whole confusing world at your fingertips. Provided you do not fall in love with the "story" of a particular share or Exchange Traded Fund, one chart is as good as another, if it shows excellent conformity with my methods.

With that in mind, I shall cover Microsoft, which can be considered the bellwether of the computing industry. When investing in these dollar-denominated shares (becoming a shareholder), you have an exchange rate risk (or opportunity), which is absent when spreadbetting. That should be kept in mind when you consider hedging activities.

The company is one of the pioneers of the PC software industry that has transformed the way we communicate, compute and access the internet. It introduced the first version of Windows in 1983 and latest-quarter revenue was reported at $22 billion (£15 billion).

Its IPO was 30 years ago with shares priced at $21. If you had bought 100 shares then, after stock splits they would be worth around $250,000 today.

But if you had sold them in December 1999, you would have netted $1.4 million - almost six times as much after holding for only eight years!

And thereby hangs a tale - one of timing. This is a theme I have been stressing mightily in my emails.

Here is the daily chart from the 2009 lows:

I have a classic large-scale impulsive Elliott wave, with the final wave five ending recently at the $57 region. Wave one is a beautiful five-up that is my textbook indicator that the trend had changed from down to up. Wave two is a typical A-B-C three-down that confirms the uptrend.

Then, wave three is a long and strong multi-year bull run that is made up of its own five-up (marked in green). In fact, this green five-up contains its own wave three that possesses its own five-up.

A diversion: What a stunning demonstration that waves within markets are fractals - self-similar swings that operate on all time scales. To show this, here is the 1-minute chart, which I defy anyone to tell apart from the daily chart (unless I told them the different time scales!):

Even on this fine scale, I have a terrific tramline pair with a nice Prior Pivot Point (PPP) on the lower line. The trading channel contains all of the trading in the decline and this move is a complete five-down. When the fifth wave ended, the market rallied in what should be an A-B-C relief rally. Indeed, the market rallied hard with a gap as it passed above the upper tramline.

The upper tramline was a line of resistance, but with the five-wave completion and the break above it, it becomes a line of support.

On this very short time scale, I can tell that the A-B-C rally has probably completed, with the market having hit the Fibonacci 50% retrace of the entire move down. But keep in mind that the vertical scale covers less than 50 cents per share and is of interest to scalpers only!

But my point is that a day trader can use my methods if they wish to pick up pennies in front of steamrollers (as so many do). I prefer to position for decent swings that may take a few weeks or months to evolve.

To return to the daily chart, here is a close-up of recent action:

Waves three and five both ended at around the $57 level and that makes them possible candidates for a double top (DT). To qualify as a genuine DT, I like to see the peaks separated by at least six weeks, and this one does.

The decline off wave three is certainly interesting, as the blue support line was broken as wave four developed in an A-B-C form with the B wave kissing the underside of the blue line (now resistance).

Then, wave five rallied back to $57, but on Friday, the support line was broken with the huge gap down following disappointing results. This is a repeat of the action following the first blue support line break on poor results the previous quarter, albeit on a stronger break.

To cap it off, momentum has been declining since last year, as buying pressure was clearly weakening.

There is no doubt that Friday's 7% plunge has hurt the bullish case and, with a possible DT in place, the market may try to close the gap - but will have immense difficulty in breaking into new high ground.

Odds are strengthening that the trend has now turned down. A break of the wave four low at the $48 level should seal it.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.