Dow component Microsoft Corporation (MSFT) has exploded to the upside in the past week, lifting more than 15 points to an all-time high above $130. The announcement of the next generation Xbox gaming console has underpinned the rally, along with the run-up to this year's Electronic Entertainment Expo (E3). Healthy volume has matched growing optimism, predicting even higher prices in the coming months.

However, the stock is short-term overbought after gaining 12% in five sessions, increasing the odds for a multi-week pullback to shake out weak hands and consolidate impressive gains. The June 5 gap between $123 and $124 could offer a low-risk buying opportunity in this set-up, narrowly aligned with the 50-day exponential moving average (EMA). As for potential upside, "Mr. Softee" has been the top performing Dow component so far in 2019, and the stock could trade above $150 before the end of the third quarter.

The new Xbox, code-named "Project Scarlett," will be backward-compatible, supporting 8K monitors, ray-tracing graphics, and SSD storage. More importantly, the system will off-load many functions to the cloud, speeding up load times, frame rates, and graphics displays. Advanced Micro Devices, Inc. (AMD) will provide Navi graphics architecture and Zen 2 CPU chip sets for the new console, which is set for release in late 2020.

MSFT Long-Term Chart (1999 – 2019)

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A historic advance ended near $60 in December 1999, reversing in reaction to government antitrust action driven by the near monopoly of the Windows operating system. The stock tested new resistance in March 2000 and turned sharply lower when the internet bubble burst, dropping to a two-year low in the upper teens in December. A 2002 downturn found support 52 cents above the prior low, posting a double bottom that yielded mediocre upside during the mid-decade bull market.

The rally ended at the .382 Fibonacci retracement of the bear market decline in 2007, giving way to a downturn that accelerated during the 2008 economic collapse. The stock broke support at the 2001 low in early 2009, finally coming to rest in March at an 11-year low. That marked a historic buying opportunity, ahead of a complex recovery that took nearly five years to complete a round trip into the 2007 high.

The uptrend reached 1999 resistance in 2016, yielding an immediate breakout that posted impressive gains following the presidential election. Microsoft stock has more than doubled since that time, posting stronger returns than rival Apple Inc. (AAPL), and it is now trading at an all-time high. Healthy volume has accompanied the multi-year uptick, with the on-balance volume (OBV) accumulation-distribution indicator close to an all-time high as well.

The monthly stochastic oscillator crossed into the overbought level in October 2016 and stayed there for more than two years before crossing into a sell cycle in the fourth quarter of 2018. It turned higher mid-panel in March 2019, exhibiting unusual strength, and has returned to the overbought level once again. Given recent history at this level, market players shouldn't rely on the next sell cycle until it undercuts the first quarter low (red line).

MSFT Short-Term Chart (2016 – 2019)

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Price action since 2016 has been contained within lower and upper trendlines (black lines) that form the outline of a massive expanding wedge pattern. The strong June uptick has now reversed at the upper trendline, indicating that the stock is short-term overbought and in need of a multi-week pullback or consolidation. It's also wise to note that the rally since December has carved a completed Elliott five-wave pattern, which also predicts a pullback in the coming weeks.

The Bottom Line

Microsoft stock lifted to an all-time high earlier this week, driven by optimism about the new Xbox console and a short squeeze after the Mexican tariff scare. While the stock should trade lower in the short term, highly positive technicals support an eventual rally above $150.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.