Microsoft is down more than 28% from its all-time high, which was seen in July but retested in October. In just three and a half months, MSFT has given up nearly 30% of its value.

Two reasons were key in triggering the retreat. The first is that the market feels AI investments are going to extremes relative to their expected revenue. Capital expenditures of AI and data center firms have grown too quickly. Firms have started to borrow more using corporate bonds and this trend expected to continue at a faster pace. Oracle was one of the first and biggest triggers as the company’s CDS suddenly jumped. Microsoft’s 5-year CDS jumped from 20 to 39 in October, which also coincides with the top share price we mentioned. The rise in CDS and the sharp retreat in the share price started at the same time.

The second reason, which is not completely independent from the first, is OpenAI. ChatGPT has started to lose its advantage as a generative AI tool, and the new version did not satisfy expectations. Now the company is considering advertising revenue on top of membership while rivals continue to make advancements.

After the latest earnings report, the sell-off extended, and now Microsoft is testing the 39-month-long trendline. While the concerns that triggered the sell-off are justified, the company still has too much potential. As long as the trendline holds, we see at least a 30% upside for the stock both technically and fundamentally. The general market opinion is even more optimistic than our assessment. Eighty-two sources listed in Bloomberg gave Microsoft a buy rating, and 0% a sell rating. The weighted average return potential is 49.5% on the same list.

The options market seems to have the same idea as well. After the latest earnings report that triggered the final sell-off, a surge of call options followed. Now the open interest difference between calls and puts, along with the total call open interest, is at its highest levels in years.

MSFT has been testing the trendline since February 5. For almost two weeks, the test has been going on while trading volume has been falling. This is an indicator that the bears’ strength is getting lower and lower, and the odds of an upward reaction are rising. So why are we not completely bullish instead of just bullish as long as the trend holds? Because if the trend fails, there is a chance of a long squeeze. However, if the trend holds (except for a couple of days’ breach) and Microsoft makes a sharp comeback, with emphasis on sharp, there could be a chance of a future gamma squeeze because of the high call open interest.