MSFT Trade on Apr 22, 2016 09:49 from tradephd: Tradervue User Stock Trades.

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tradephd

 

Play Idea

Trading Microsoft after their Q3 earnings report was one of my favorite trades in the past couple of months and the first trade I wanted to add to my playbook because it's a play that I definitely want to repeat. I've been watching Microsoft a lot since I started trading and it has a consistent pattern after their earnings report: If they have a positive earnings report their stock will shoot up $4 to $6 and if they have a bad earnings report their stock will fall $4 to $6. These types of moves are common with large cap stocks but what's interesting is the ranges that Microsoft moves within. $MSFT will move between $48 and $56 pretty consistently. For a swing trader, these are nice levels to play with from both a long and short position.

The night before the trade, I reviewed the news around Microsoft's earnings report:

Basically, revenue growth has slowed to a crawl, and investors are not impressed. The company also issued poor guidance for the next quarter and had to make a tax adjustment that hurt earnings.

Here's how the quarter stacked up against Wall Street's expectations:

EPS: $0.62 (non-GAAP) vs $0.64 expected. GAAP EPS was $0.47.
Revenue: $22.1 billion (non-GAAP) vs $22.09 billion expected. GAAP revenue was $20.5 billion.
On the earnings call, the company issued revenue guidance for the next quarter of $21.7 billion to $22.4 billion, below analyst expectations of $23.1 billion. That sent the stock further down after hours.
via Business Insider

In after hours trading the stock immediately pulled back from $56 to just above $52. I took a look at the following daily chart to see where the major support levels were.

From the daily chart you can see that there is a major support level at around $50.80. With this mind, I started to setup up the play to short $MSFT after the open the next day. I wanted to watch the price action to see which direction it would go, and if it went south I wanted to start a short position and then see how far the price would be pushed down.

I started half of my position at 9:49am and waited a couple more minutes to add to my position. I was only trading 400 shares and looking back now I should have been trading 600 to 800 shares which I could have done. However, I wanted to play it a bit conservative because usually I don't like to trade before 10am because of the direction of the price can be hard to determine because of the heavy volume near the open.

Over the next 30 minutes I saw the price go from $51.80 to $50.80. Like I said, I should have continued to add to my position, especially seeing the heavy selling pressure on Level II. Once the price hit that $50.80 support level, I covered my position. The price then immediately bounced and the stock started to go back up. I had to leave my computer so I didn't start a new long position to play the bounce but I was amazed to see how it bounced back up to $52.

Conclusions

I think this pull back was because of a lot panic selling in the after hours the day before and at the open that pushed the price down to $50.80. If you take a closer look at Microsoft's earnings report and listen to their conference call, it seems like the last quarter was really an adjustment quarter for them and they are setting themselves to be in a good position in the future. I think $MSFT is a good long term bet for the future.

For this trade through, it was important to be aware of that support level before making the play to know what was the price target you aiming for. Looking back now, I also could have doubled my profits if I played the bounce, which is something I will look for in the future. I will also look to play these types of trades more aggressively when this pattern presents itself.


Execution detail:

Date/time Symbol Side Price Position
2016-04-22 09:49:00 MSFT sell $51.800 short
2016-04-22 09:49:00 MSFT sell $51.800 short
2016-04-22 09:51:00 MSFT sell $51.850 short
2016-04-22 10:19:00 MSFT buy $50.800 0


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