Adobe (ADBE - Get Report) is a popular play on cloud computing, but investors must recognize that this stock is a momentum stock not a value stock. My call is to buy Adobe on weakness to its weekly value level and 200-day simple moving average, which are converged at $269.99 and $269.61, respectively.
There is considerable competition in the cloud computing space and the weekly chart shows declining weekly slow stochastics for the stock. Adobe is not fundamentally cheap as its P/E ratio is elevated at 48.27 and the company does not offer a dividend, according to Macrotrends.
The stock closed last week at $278.35 up 23% year to date and in bull market territory 35.8% above its Dec. 24 low of $204.95. The stock is also in correction territory, 11.1% below its all-time intraday high of $313.11 set on July 19.
Adobe reports quarterly earnings after the close on Tuesday, Sept. 17, and analysts expect it to earn $1.97 to $2.02 per share. Subscriptions for digital media software in the Creative Cloud and Document Cloud accounts for 70% of Adobe's revenue, which includes Photoshop and Adobe Acrobat. Subscriptions to their Experience Cloud for content delivery accounts for 30% of total revenue. The growth rate appears stable, but most likely slipped slightly in the current quarter.
The Daily Chart for Adobe Systems
Courtesy of Refinitiv XENITH
The daily chart for Adobe shows the formation of a "golden cross" on March 15, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead and this tracked the stock to its all-time intraday high of $313.11 set on July 19. Today the stock is between its 200-day SMA at $269.61 and its 50-day SMA at $293.61. The annual value level is below the chart at $196.58. Above the chart are monthly and quarterly risky levels at $329.20 and $333.29, respectively. The stock is between its weekly value level at $269.99 and its semiannual risky level at $289.81.
The Weekly Chart for Adobe Systems
Courtesy of Refinitiv XENITH
The weekly chart for Adobe is negative, with the stock below its five-week modified moving average of $287.77. The stock is well above its 200-week simple moving average or "reversion to the mean" at $178.89. The 12x3x3 weekly slow stochastic reading is projected to slip to 34.85 this week down from 42.44 on Sept. 13. At the July 19 high, this reading was 88.20, just below the 90.00 threshold, which would have made the stock an "inflating parabolic bubble."
Trading Strategy: Buy weakness to its weekly value level at $269.99 and reduce holdings on strength to its semiannual risky level at $289.81.
How to Use My Value Levels and Risky Levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play.
The weekly level changes each week. The monthly level changes at the end of each month, the latest on Aug. 30. The quarterly level was changed at the end of June.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to Use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."