Adobe (ADBE - Get Report) is a popular play on cloud computing, but investors must recognize that this stock is a trade on technical momentum, not as a value stock. My call is to sell Adobe on strength to its risky level for this week at $284.60 as its weekly slow stochastic reading fades. Adobe has an elevated P/E ratio of 48.37 and does not offer a dividend, according to Macrotrends.
The stock opened higher on Tuesday at $280.37, up 23.9% year to date and in bull market territory, 36.8% above its Dec. 24 low of $204.95. It's down 3.9% since setting its all-time intraday high of $291.71 on April 29.
Adobe reports quarterly earnings after the close on Tuesday, June 18, and analysts expect it to earn $1.78 to $1.83 per share. It's all about cloud computing and competition is fierce. 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 27% of total revenue. The remainder of revenue comes from licenses of legacy products.
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 would follow and the all-time intraday high of $291.71 was set on April 29. Since this high, the stock traded as low as $257.46 on June 4, staying above its 200-day SMA, now at $256.58. The stock is above its monthly and semiannual value levels at $247.99 and $235.45, respectively, and below its risky level for this week at $284.60. The stock is above its 50-day simple moving average at $275.82 and well above its 200-day SMA at $256.58.
The Weekly Chart for Adobe Systems
Courtesy of Refinitiv XENITH
The weekly chart for Adobe is neutral with the stock above its five-week modified moving average of $275.25. The stock is well above its 200-week simple moving average or "reversion to the mean" at $165.25. The 12x3x3 weekly slow stochastic reading is projected to slip to 61.43 this week down from 62.84 on June 14. At the April 29 all-time high, this reading was 90.56, which is above 90.00 -- an "inflating parabolic bubble." A weekly close below $275.25 downgrades the weekly chart to negative.
Trading Strategy: Buy weakness to its monthly value level at $247.99 and reduce holdings on strength to its risky level for this week at $284.60.
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 semiannual and annual levels remain in play. The weekly level changes each week; the monthly level changed at the end of January, February, March, April and May. The quarterly level was changed at the end of March. 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.
The close on June 28 is the second most important for 2019. This close is an input to my proprietary analytics and will generate new weekly, monthly, quarterly and semiannual levels.
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."