Microsoft purchasing TikTok – short-term correction ahead?

August 14, 2020 14:00

Into the close of the past week of trading, tensions between the US and China have risen again with US president Trump banning U.S. transactions with the Chinese owners of the WeChat messaging app and TikTok video-sharing app.

The executive orders come into effect in 45 days, leaving thus a little more than one month to complete the purchase of TikTok's US operations through Microsoft – what implications could this have for the stock price of the US Tech giant?

Tensions between the US and China build, while Amazon CEO sells stocks – coincidence?

At first glance, it seems attractive for Microsoft to buy TikTok's US operations: in transferring TikTok's software code, which estimates show could be up to 15 million lines of artificial intelligence, the company's position in this sector could be cemented globally.

And while US president Trump said last week that the U.S. Treasury should get a cut of the acquisition, it is not very clear how that would work or if it's even legal, which means that Microsoft is about to close an attractive deal worth between 10 to 30 billion USD.

But what's certainly intimidating is that tensions between the US and China are again building, obviously amidst Trump's re-election campaign for the November elections, which could explain his aggressive stance and rhetoric towards China. In our opinion, it seems 100% certain that China will retaliate in one way or another.

However, there is a massive extended mode in the US tech sector, especially, with Apple, Amazon, and also Microsoft pushing to new All Time Highs despite the uncertain outlook in regards to the economic impact of the Coronavirus lockdown.

What's noteworthy in this context: Amazon's CEO, Jeff Bezos, has sold more than $3.1 billion worth of shares in his company, which were part of a prearranged 10b5-1 trading plan, according to filings.

While rule 10b5-1 allows company insiders like CEOs to set up a predetermined plan to sell company stocks in accordance with insider trading laws with price, amount, and sales dates being specified in advance, the last time Bezos sold more than $4.1 billion worth of shares in the company was in February, shortly before the massive crash due to the Corona lockdown.

While this may be a 'coincidence', rising tensions and Chinese retaliation in one way or another in the digital space could trigger a sharp corrective move many market participants seem to be waiting for, given the massive extension on the upside.

How to trade #MSFT in this environment?

While we are remaining clearly bullish on Microsoft stock, a short term-correction could certainly be expected and probably traded profitably in the short-term.

On the daily time-frame, we can spot a potential bearish divergence in the RSI(14), indicating diminishing bullish momentum with a break below 210.00, potentially resulting in an acceleration of bearish momentum.

Still, such a break should be traded cautiously and conservatively, since the sequence of rising highs and lows has remained intact as long as the stock has been trading above 200 USD.

A break below that level would interrupt the technical long-sequence, making a correction to as low as the 185 to 188 USD region an option.

Nevertheless, pushing to new All Time Highs and above 220 USD could negate this bearish thought, levelling the path for further gains in #MSFT:

Source: Admiral Markets MT5 with MT5SE Add-on #FB chart (between April 03, 2019 to August 13, 2020). Accessed: August 13, 2020 at 08:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of #MSFT increased by 19.44%. In 2016, it rose 12.00%. In 2017, it increased by 37.66%. In 2018, it went up 18.74% and in 2019, it increased by 55.26%, meaning that after five years, it was up 238.3%.

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