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Taking profits near-term, but MSFT looks to roll

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Just ahead of earnings, traders were alerted to a bullish trade in shares of Microsoft (NASDAQ:MSFT) $56.80 +7.2% in the market monitor and should be looking to book some gains as the stock has achieved a near-term target. Traders holding November expiration can look to book gains at current levels, but then look to take some of those gains and roll out to some longer-term call options as the stock breaks above a very large base that has been forming since May.

Microsoft Chart - $1 box

Shares of MSFT are on the move after what is being viewed as a favorable court ruling late last week. While longer-term bullish, I feel traders that took our bullish trade from the market monitor just ahead of earnings should be looking to book some gains in their November expiration calls, but then look to roll further out to April expiration as the bullish vertical count now grows to $84. Combined with the spread-triple-top buy signal at $54, the stock looks to have upside of $66.36, based from Professor Davis' probability studies that this pattern was profitable 85.7% of the time for an average gain of 22.9% over a 7.7 month period.

According to Dorsey/Wright and Associates, the software group as a whole is currently in "bull alert" status at 29.1% and would achieve "bull confirmed" status should the bullish % reach 32%, hinting that the software group is far from being "overbought" at the 70% level. In January of this year, the software bullish % reached a level of 62% bullish before reversing lower.

The bullish action in MSFT has lifted many of the broader market indices today as this stock is a component of many. The Dow Industrials (INDU) of which MSFT is a component is posting a gain of 168 points at 8,686. The S&P 500 Index (SPX.X) 919 +2.13% has broken to new relative highs today after generating a double-top buy signal on Friday. Bullish technicals are unfolding in the S&P 100 Index (OEX.X) 468 +2.29% today as this index generates a spread-triple-top buy signal at 465 ($5 box scale) and breaks above its longer-term bearish resistance trend.

The NASDAQ-100 Index (NDX.X) 1,058 +3.86% is trading similar to that forecasted in our Index Trader Wrap as it relates to MSFT trading the $56 level as the NDX now trades at critical horizontal resistance of 1,050. On traditional $50-box scale, it would take a trade at 1,100 for the NDX to generate a double-top buy signal. On $50-box scale, the NDX has not been able to generate a buy signal since May of 2001.

Jeff Bailey

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