Microsoft’s Downfall
Microsoft has been one of the top-watched stocks on the planet, especially for the last several weeks. The nasty double top pattern that occurred last summer has continued to play out to the downside, and with each level, it has drawn new buyers.
I’m sure you know I’m a huge fan of MSFT, and it’s long been one of my top long-term positions, as well as one of my favorite tickers to trade. However, something has changed. The spark that initially ignited Microsoft’s rapid rise last year was largely due to its OpenAI deal and the excitement around AI. The downfall has been swift, starting at first with a lack of buyers after so much exuberance, but that downside was compounded by continually improving AI models.
Earnings Red Flags
Two major red flags occurred in July and October of 2025. The day after earnings on July 30th, the market greeted them with much excitement, opening +8%; however, the post-earnings gap did not hold. The following quarter, Microsoft rallied into earnings but couldn’t break July’s high, creating a double top.
Then came earnings in January of 2026. In spite of a big EPS beat, MSFT remained stuck below the 200 SMA on the daily chart and trapped in a downtrend. It even gapped down -8.6% post-earnings.
The Canaries in the Coal Mine – Software Stocks (IGV)
Microsoft has long been a market leader. I’ve used it to identify critical market shifts for years. It’s always been ahead of the big moves. This time, it’s not leading higher, but lower.
Software stocks have been taking a massive tumble as executives everywhere realize they don’t need anywhere near as many employees to create what they once did. By using AI tools, corporations can develop software significantly faster, cheaper, and better than with human developers. While Microsoft is still beating EPS estimates, and it’s holding the 200 SMA on the weekly chart, this entire sector has been waving a massive red flag.
Right now, IGV, a critical software ETF, is holding the 200 SMA on the weekly chart. Effectively, the very last line in the sand. It’s also holding Fibonacci symmetry support from the bear market. This move is measuring up to the bottom of the bear market, but in my mind, the bearish move is just beginning. It was only recently, at the beginning of February, that new Claud updates began prompting more executives to realize just how many people they can lay off.
In the short term, there will be what I would call bear-market rallies, where stocks in this space rip higher as buyers hold onto hope. However, I expect these rallies to be sold. Some, like Palantir (PLTR), may survive. Ideally, Microsoft has enough fingers in AI, plus strong fundamentals, to ultimately hold on and prevail, but many software names will not.
Some of the key names on my Short the Rallies list include: CRM, ADBE, NOW, and ORCL.
I’m not going to sell my MSFT shares, but I’m keeping a very close eye on the critical support zone on the weekly chart at $375. If it breaks, I’ll reconsider. But in the meantime, I’ll trade it along with the bearish downtrend it’s in on the daily chart.
