How to Research a Stock in Stock Rover Part III – Technicals

Overview

This is the third of a three part series designed to show you how to effectively use Stock Rover to research a stock. We will be using Microsoft (MSFT) as our example company.

The three part series focuses on researching a stock in the following sequence:

  • Part 1 – Doing a deep dive on a stock using the Insight Panel
  • Part 2 – Comparison with peers using the Table
  • Part 3 – Price performance and technicals using the Charting Facility

As this is part 3, we will be focusing on the Stock Rover Charting Facility. There is a wide variety of features and capabilities within the charting facility. We will be using a targeted subset of the available features to examine Microsoft’s price performance attributes.

The Charting Facility is found by clicking on Chart in the Start Menu on the left-hand side of Stock Rover as shown below

Start Menu - Chart

Price Chart

When examining the performance of a stock, ETF or fund, I like to begin with the basic price chart, set to the maximum date range, which is over 15 years. Here is Microsoft’s chart.

Price Chart Microsoft 15 Years

When you look at this chart, it seems Microsoft the stock did basically nothing from 2007 to 2013, then started to slowly rise in 2014. If you read Part 2 of this blog series, you would correlate that with the arrival of the new, and still current CEO, Satya Nadella. Then around 2016, the stock went stratospheric, until the start of 2022. So far in 2022, both Microsoft and the market as a whole have had a very rough ride.

There is a problem interpreting this price chart when a stock has a massive price change. Specifically, if the stock trades at 300, a move to 302 or 298 isn’t much and doesn’t look like much, which is what one expects. But earlier on the same chart, when the stock traded at 20, that same 2 point move, going to 22 or 18 is in fact a big deal, as it’s a 10% move. But it gets completely lost on the chart.

To fix this, we can put the price chart into logarithmic view, which makes the Y axis segments equal percentages changes rather than equal price changes, as shown below.

Price Chart Logarithmic Microsoft 15 Years

We now notice that Microsoft’s price rise really started earlier than 2014, more like mid-2011 and accelerated a bit in mid-2013. We also see that the price decline experiences thus far in 2022, though substantial, are a bit less scary and more normal looking. Logarithmic charts work great for stocks that have had major price increases or declines over time.

Simple Moving Averages

One of the most common technical indicators that investors use to diagnose price action is the 50 day and 150 day simple moving average. These indicators smooth out the price action and are very good for showing short and intermediate pricing trends. The chart shown below is a 5 year chart of Microsoft with the 50 and 150 day SMA lines drawn.

Price Chart Microsoft SMA 5 Years

The basic rule of thumb when using 50 and 150 SMA technical lines, is when the 50 day SMA is below the 150 SMA it is not good (bearish). Conversely when the 50 day line is over the 150 day line, it is bullish.

Furthermore, the actual cross of the 50 day line over the 150 day line is considered a buy signal. Conversely, the 50 day line crossing under the 150 day line is considered a sell signal.

In the above chart we can see that Microsoft has been on a long bullish run since 2017, with the 50 day above the 150 virtually the entire period. Then things turned south at the start of 2022. The 50 day line began a sharp descent at the beginning of the year and actually generated the sell signal when it crossed the 150 day line on February 25th.

Since then the stock has headed further south, albeit with a couple of brief rallies, with each high point below the previous one. This is a classic bearish pattern, lower highs and lower lows.

Bollinger Bands

Bollinger Bands show the price relative to the price movement of the last 20 days, using 2 standard deviations of the daily price change as the bandwidth. Note that both the number of days and the number of standard deviations are settable in the chart.

Price Chart Microsoft Bollinger Bands 1 Year

Bollinger Bands are a versatile indicator as they incorporate moving averages, volatility and the current price. The basic idea is the price tends to bounce off of both the low band and high band. If the price is near the low band, it is considered a good time to buy, as the stock is considered oversold. If the stock price is near the high band, it may be a better time to sell, as the stock is overbought.

However, if the overall trend of the bands is down, as it has been since the beginning of 2022 for Microsoft, then even if the stock is close to the lower band (oversold), it is still not a good time to buy.

Conversely, the best time to sell, if you are looking to sell, is when the price band is near the upper band, as it is now for Microsoft. The pattern for Microsoft is bearish, and if you own the stock and are inclined to sell it, the Bollinger Bands say now would be the time.

Vs Industry and Sector and S&P 500

One chart I like to look at is the stock vs. its industry, sector and the S&P 500. A stock can be performing poorly, as Microsoft currently is, but the poor performance may be entirely due to underlying industry, sector or market woes. Within that context, the stock may actually be doing fine, relatively speaking. Let’s take a look.

Price Chart Microsoft vs Benchmarks 1 Year

In this chart, shown above, I have set the S&P 500 as a baseline, so the performance of Microsoft’s stock, the software infrastructure industry, and the tech sector are all charted vs. the S&P 500.

The chart tells us that starting in around mid-November 2021, Tech started to underperform the S&P 500. The software infrastructure industry within tech is performing similarly. Microsoft for its part, is valiantly trying to fly well above its environment, outperforming the software infrastructure industry and the tech sector by a wide amount. The classic case of a strong stock in a week sector/industry.

However, the outperformance that Microsoft has enjoyed vs. the S&P 500 is now evaporating. So this chart also paints a bearish picture for the stock.

Maximum Drawdown Event

With all this bleak news regarding the stock’s price action, one thing I like to look at is, worst case, how much money could I lose? The Maximum Drawdown event in the chart can help us with that critical piece of information.

I have created three different price charts for Microsoft to see what the maximum drawdown was in each period.

The first chart is for one year, shown below, with a maximum drawdown of 26%.

Price Chart Microsoft - Maximum Drawdown 1 Year

The second chart period is five years, shown below, with a maximum drawdown of 28%.

Price Chart Microsoft - Maximum Drawdown 5 Years

The third chart period is fifteen years, shown below, with a maximum drawdown of a whopping 58%.

Price Chart Microsoft - Maximum Drawdown 15 Years

So while Microsoft is an enormous company with an enormous market cap, the numbers show that you can still lose lots of money with this stock when things go south in the market. The point being, Microsoft is not a “safe” stock, if there is any such thing. If you buy it or own it, strap in, it can take you for quite a ride, up or down.

Valuation Chart

While the thrust of this article is on the price performance attributes of Microsoft, I thought it worthwhile to take a small detour into another key part of the charting facility to get look at a key valuation graph that Stock Rover can produce.

Stock Rover has four types of valuation charts; Price vs. Fundamental, Historical Range, Football Field and a Scatter Plot chart. We are going to focus on the Football Field chart.

Below is a screenshot of the Football Field chart for Microsoft covering the last five years. It makes for quite a powerful presentation of valuation data as you can view current valuation metrics (blue vertical line) vs. its five year range.

Valuation Chart Microsoft Football Field 5 Years

Looking at this chart, we quickly see that Microsoft’s P/E, while still not cheap by any means, is now much lower than it has historically been during the last 5 years. Other metrics like EV/EBDITA, Price to Book, Price to Sales, Price to Cash Flow and Price to Free Cash Flow are all in “neutral” territory.

The bottom bar, price, is interesting because it shows us the extent of Microsoft’s price rise in the last 5 years. The price has increased more than 5x from its lowest value to its highest value in the 5 year period. The stock is currently in the 4th quintile, which means it is more expensive than average over the past 5 years. That is to be expected because stocks generally rise over time. In the last 5 years the market itself has roughly doubled and Microsoft has gone 5x. The fact that it is not in the top quintile actually shows there has been a significant price retracement.

Overall, the Football Field Chart is telling us that Microsoft, while no bargain, is, on a relative basis, more reasonably priced than it has been before. On an absolute basis, it is probably still a bit expensive. A top quality stock like Microsoft will normally carry a premium to the market and that is where it sits now, with a P/E of around 28 vs. the S&P 500 at around 21 as of this writing.

Ratio Charts

Ratio charts are a visually powerful way to see relationships and trends between two different sets of time series data. Typically ratio charts are used for price data, like how Microsoft is performing relative to Apple. However, ratio charts can also use non-price metrics in the numerator or denominator such as sales or price to earnings.

One of the best features of Ratio Charts is the ability to plot technicals that are computed from the ratio line, such as Simple Moving Average, Exponential Moving Average and Bollinger Bands.

Ratio Charts are found at the bottom of the Technical Charts dropdown menu as shown below

Technical Chart Menu - Ratios

Microsoft vs Apple

Let’s take a look at Microsoft vs. its two main competitors, Apple and Google (aka Alphabet) over the last two years. We will also include the 50 and 150 day simple moving average lines. Let’s first look at Microsoft vs. Apple. The two year ratio chart is shown below.

Ratio Chart Microsoft vs Apple 2 Years

Since Microsoft is in the numerator of the ratio, an ascending line means Microsoft is outperforming Apple, and a descending line means Apple is outperforming Microsoft.

We can see that over the 2 year period, it looks like a basketball game, where Apple won the first quarter, Microsoft the second, Apple the third, and Microsoft is starting to win in the 4th quarter. So Apple is leading overall, but Microsoft has the momentum.

The technical lines over the chart period of two years favor Apple, but the SMA 50 is just starting to turn in Microsoft’s favor. So the bottom line is this: between the two, the better bet right now is Microsoft, because the ratio chart is now shifting back in its favor.

Microsoft vs Google

Now take a look at Microsoft vs. Google over the last two years. Again Microsoft is in the numerator of the ratio, and again an ascending line means Microsoft is outperforming Google, and a descending line means the opposite.

Ratio Chart Microsoft vs Google 2 Years

Against Google, we can see a similar pattern as with Apple. Except this time we have a football game, where Google won the first half and is leading the game, but Microsoft is winning the second half and has all the momentum.

The technical lines clearly favor Microsoft. The SMA 50 has already crossed the SMA 150 on the upside, which is the SMA buy signal. However, in this case it is not actually a buy signal, but a signal that says that if you are going to buy one of these, buy Microsoft, not Google.

Ratio charts, along with Visuals, I think are among the most underappreciated features in Stock Rover. They can tell a very interesting story when you are comparing competing investment ideas.

Key Technical Charts

There is a whole host of additional technical charts in Stock Rover. We will go through many of them so you can see what they can do and what they say.

Before we jump into the technical charts, a quick note. You can reach all the technical charts from the technical chart pulldown menu as shown in the screenshot below.

Technical Charts Menu

Accumulation Distribution Chart

We will begin with the Accumulation Distribution chart.

An Accumulation Distribution chart is designed to measure the flow of money into and out of a security to determine if a stock is being accumulated or distributed. It takes into account the price change as well as the trading volume of a stock. More weight is given to price changes that are accompanied by higher volume.

It is a cumulative indicator meaning the results of the current period value are added or subtracted from the prior value. The actual formula for the Accumulation Distribution chart can be found here.

The Accumulation Distribution chart for the last two years for Microsoft is shown below.

Accumulation Distribution Chart Microsoft 2 Years

What matters is the shape of the chart line, especially in relation to the price chart shown above.

There are a lot of possibilities for interpretation for this chart, but basically when both the price chart and the Accumulation Distribution chart are making higher peaks and troughs, the uptrend is likely to continue. This is true for the Microsoft chart from the beginning of the chart through the end of December 2021.

The price starts making lower troughs, but the Accumulation Distribution chart fails to make lower troughs. This condition is known as positive divergence and it means that the down trend is likely to stall or fail. This chart is therefore a piece of good news if you own or are thinking of buying Microsoft.

Aroon Oscillator Chart

The Aroon Oscillator chart is designed to tell you whether a stock is in an uptrend, downtrend or trading range. It can also help determine when a stock is transitioning from trend to trading range and vice versa.

The Aroon Oscillator has two lines, the Aroon Up line and the Aroon Down line. Each line ranges from 0 to 100. They are used to indicate how much time has passed since the period high and period lows were reached. 100 means the high or low was reached at the end of the period, whereas a 0 means at the beginning of the period (i.e. further back in time). The actual formula for the Aroon Oscillator chart can be found here.

The period is settable, Stock Rover uses 25 days by default. A 25 day period is what was used for the two year Aroon Oscillator chart for Microsoft, shown below.

Aroon Chart Microsoft 2 Years

So how do you interpret this thing?

If the up line in green crosses above the down line in red, it signals that a new uptrend may start soon. A cross the other way, green below red, signifies a new downtrend may start soon.

If the up line hits 100, a new uptrend may have begun. Similarly when the down line hits 100, a new downtrend may begin.

If the upline remains between 70 and 100 and the down line is at 30 or below then an uptrend is underway. Reverse those numbers and a downtrend is underway.

So with all of this, how do we interpret Microsoft? Well the up line is below 30, but the downline has dropped below 70. This means the downtrend may be ending, which reinforces the view of the Accumulation Distribution chart.

Average Directional Index Chart

The Average Directional Index chart is designed to tell you whether there is a price trend, and if so, what is the strength of a price trend. The details of the calculation, which are not for the faint of heart, can be found here.

The Average Directional Index chart for Microsoft for the last year is shown below.

Average Directional Index Chart Microsoft 1 Year

There are three lines on the chart, the Positive Directional Indicator represented by the +DI line in green. Then there is the Negative Directional Indicator, represented by the -DI line in orange. And finally the Average Directional Index line in blue.

When the +DI is trending up, and is above the -DI line, then the price uptrend is strengthening. Conversely, if the +DI is moving down, and is below the -DI, then the price downtrend is strengthening.

The strength of the trend itself is indicated by the Average Directional Index line. If the line is above 25, then the trend has strength. Below 25 the trend is weak. Below 20 is essentially trendless.

So for Microsoft, this indicator shows there currently no real pricing trend. The +DI is currently below the -DI, which would indicate a downward pricing trend. The Average Directional Index line is below 20, which means the pricing is essentially trendless.

Keltner Channel Chart

Keltner Channels are volatility-based bands that create an envelope above and below an exponential moving average (EMA) price line. In addition, the actual price over time is shown in open, high, low, close format. There is a lot of information on this chart.

Keltner Channels are similar to Bollinger Bands, except that Keltner Channels use the Average True Range (ATR) to set channel distance, whereas Bollinger Bands use standard deviations based on price volatility. Generally Keltner channels are smoother than Bollinger Bands because the Average True Range is generally less volatile than the standard deviation computation. This in turn creates a more consistent channel width.

With a Keltner Channel Chart, all the parameters are settable. By default the EMA is 20 days, the ATR is set to 14 days, and the ATR multiplier, which sets the envelope width, is set to 3.

The Keltner Channel upper band can be used to help determine resistance levels and the lower band for support levels.

The Keltner Channel Chart for Microsoft for the last year is shown below.

Keltner Channel Chart Microsoft 1 Year

So how do we interpret this chart?

Basically we are looking for breakouts above the channel when in an uptrend (bullish), or breakouts below the channel when in a downtrend (bearish).

For Microsoft, there was a bullish signal just after July 1st and again in late August and late October. All are indicated with green arrows. The bearish signal first recorded in late January, indicated with a red arrow. Note that the Keltner Channel Chart is a following indicator, so that signals are given after trends are already established.

Currently the Keltner channel is saying that Microsoft is in a neutral pattern.

Money Flow Index Chart

The Money Flow Index (MFI) is an oscillator that incorporates both price and volume data. The similar, but more popular, Relative Strength Index (RSI) uses just price. For this reason, some analysts call MFI the volume-weighted RSI. In any case, I prefer it because of the volume aspect. Stock Rover also has the RSI, but in this blog I will focus on the MFI.

The calculation for the Money Flow Index is a bit involved, but the net result is an oscillator that moves between 0 and 100. The oscillator can be used to identify overbought or oversold conditions. MFI readings above 80 are considered overbought, and MFI readings below 20 are considered oversold.

The MFI can also be used to identify divergences which indicate a pricing trend change. This is when the underlying price continues to climb or fall while the MFI oscillator is moving in the opposite direction.

Note that when the MFI is at oversold or overbought levels, it is generally not considered enough information to identify a turning point. Additional confirming technical indicators are generally helpful in helping to determine a possible price reversal.

Also note that when a stock experiences a strong uptrend or downtrend, the MFI can remain in overbought or oversold territory for extended periods of time.

Below is the MFI chart for Microsoft for the past year.

Money Flow Index Chart Microsoft 1 Year

Similar to the other technical indicators we have already covered, the MFI indicators says that Microsoft seems to be in somewhat of a holding pattern with its MFI at 42.

What is interesting is over the past year, when the MFI was below 20, it did indicate that Microsoft was in fact oversold, and the price did generally rally soon after, as shown by the paired red and green arrows.

Moving Average Convergence Divergence Chart

The Moving Average Convergence Divergence Chart or MACD is a trend-following momentum indicator that can be used to generate buy and sell signals.

The MACD begins by calculating 12 day and 26 day Exponential Moving Average (EMA) lines. The actual MACD line is generated by subtracting the 26 day EMA line from the 12 day EMA line. Then a 9 day EMA line, called the signal line is calculated from the MACD line. This 9 day line, along with the MACD itself, will generate buy and sell signals.

Specifically, when the MACD crosses above the 9 day signal line, a buy signal is generated. When the MACD crosses the signal line going below, a sell signal is generated. Also the speed of crossovers is used to determine the magnitude of how overbought or oversold a security is.

The divergence is also shown between the two lines in orange. The larger the divergence, the stronger the trend. Below is the MACD chart for Microsoft for the past year.

MACD Chart Microsoft 1 Year

The MACD chart shows the MACD crossing the signal upwards in early October 2021, generating a buy signal. Then in late November 2021, a sell signal was issued by virtue of the MACD crossing the signal line below. Another buy signal was issued in late January 2022, followed by a sell signal in early April 2022.

In all four cases the MACD was prescient in selecting excellent entry and exit points. This looks to be an indicator worth paying attention to.

Right now the MACD is saying to buy Microsoft because the MACD has crossed the signal line in mid-May 2022.

Williams %R Indicator

Finally, we will look at another oscillator chart, the Williams %R.

Note that there is another technical chart that is very similar to the Williams %R, which is the Stochastic Oscillator. Also both the Williams %R and the Stochastic Oscillator are similar to the RSI and MFI charts. They all oscillate within a range between 0 and 100, (-100 for the Williams %R). However the values that are plotted are calculated differently.

We will focus on the Williams %R Indicator because it has nice green and red shading to show oversold and overbought conditions and is simpler to read than the Stochastic Oscillator, as it has one data line rather than two.

The Williams %R calculation focuses on closing price, the highest high and the lowest low in the lookback period, which is typically 14 days.

Below is the Williams %R chart for Microsoft for the past year.

Williams %R Chart Microsoft 1 Year

So what does this chart actually mean?

The chart is actually very straightforward to interpret. A reading above -20 means the stock is overbought (shaded in red) and a reading below -80 means the stock is oversold (shaded in green).

Also when the chart crosses above -50, it means that prices are trading in the upper half of their high-low range for the given look-back period. This is considered bullish. A cross below -50 means prices are trading in the bottom half of the given look-back period, which is considered bearish.

An overbought or oversold reading doesn’t mean the price will reverse, as overbought and oversold readings can persist for a long time.

Right now the chart is in the bullish region for Microsoft. And Microsoft has recently exited overbought status, both of which are positive for the stock. The question is will the recent downward trend of the Williams %R line continue long enough to take the stock under -50 and into bearish territory. This is to be determined, but recent past history indicates this is likely.

The Verdict

This is the final part of the three part blog series focusing on technicals and charting. Let’s briefly review what each part concluded about Microsoft as an investment opportunity.

Part 1 – the deep dive on Microsoft the company said buy

Part 2 – vs peers also said buy, but buying Google may be even better

Part 3 – technicals say caution

Why do the technicals say caution? It is because the price action for Microsoft has been poor thus far in 2022. And while the stock seems to be exiting a very negative trend, and is possibly inching its way into a slightly positive trend, the price action is still weak. It is not clear whether the next sustained trend will be up, or more down.

Like all things in investing, nothing is clear cut. The forecast for making money is always cloudy. With this said, here is my opinion…

Bottom line – would I buy Microsoft here as a long term investor? Yes, I would. It’s a great company, with top notch management, a wide mode and a history of creating shareholder value. Its valuation is fair to a tad expensive, but you always pay more for great companies that grow faster than the market average.

Would I buy it for the short term right here? Probably not. While there are signs that the price action is finally starting to strengthen a bit, I think it is way too early to call it a positive uptrend.

What about Google, which showed up as very compelling in Part 2 of this blog series. Google is financially stronger, cheaper valuation-wise, and is a faster grower than Microsoft. But its stock price performance is worse.

Would I buy Google for the long term? Definitely yes. For the short term? Probably not. The price action is just too negative right now.

So those would be my opinions. Please bear in mind, they are just that, opinions. Not recommendations to buy. You should always do your own research and make your own judgments before committing your own hard earned capital to any investment.

I hope you found this three part series on how to research stocks with Stock Rover enjoyable and educational. I have enjoyed writing the blog and communicating how I look at investment opportunities. My goal wasn’t so much to weigh in on Microsoft or its key competitors, but to show you how you can use Stock Rover to research any stock that you are interested in. And as a result, be able to make more confident and informed investment decisions.




Comments

John Ferris says:

Great course that explains how to interpret the available investment information.

Philippe says:

Thank you for offering such a detail way to use Stock Rover to compare and select stocks. I learned a lot and this will help me when I go through my portfolio and decides what to sell, keep and buy.

Leave a Reply

Your email address will not be published.

We value your privacy and will not display or share your email address

This site uses Akismet to reduce spam. Learn how your comment data is processed.




Top