Adobe Beats Earnings Estimates, Stock Sets New High

Adobe Inc. (ADBE) beat earnings estimates when it reported results on June 11, and the stock traded higher. Adobe stock set a fresh all-time intraday high at $429.27 on Friday, June 1.

The company is a popular play on cloud computing. However, the stock is not for value investors – it's a play on technical momentum. Adobe has a P/E ratio of 55.73 and does not offer a dividend, according to Macrotrends.

Adobe has beaten earnings estimates for six consecutive quarters, and the new high makes the weekly chart positive but extremely overbought. It's in an inflating parabolic bubble formation with a 12-week stochastic reading above 90.00 (at 93.09). This is a signal to book profits.

The daily chart for Adobe 

Adobe stock has been above a golden cross since March 15, 2019, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. This signal almost reversed on Nov. 8, 2019, but the 50-day simple moving average rose instead of declining. When under a golden cross, the strategy is to buy weakness to the 200-day simple moving average, which was doable on Sep. 26, 2019, when the average was $270.88.

The stock rallied 49% from a low of $259.57 on Oct. 23 to a high of $386.74 on Feb. 20, which was a downside key reversal day, as the close on Feb. 20 was below the Feb. 19 low. This began a decline 34% to the March 18 low of $255.13. From this low, the stock rallied 68% to its June 19 high of $429.27.

The weekly chart for Adobe  

The weekly chart for Adobe is positive but extremely overbought, with the stock above its five-week modified moving average of $385.06. The stock is well above its 200-week simple moving average, or reversion to the mean, at $225.59, which has not been tested in more than five years.

The 12 x 3 x 3 weekly slow stochastic reading ended last week rising to 93.09, up from 90.86 on June 12. This puts the stock above the 90.00 threshold that defines an inflating parabolic bubble formation, which usually precedes a decline of 10% to 20% over the next three to five months.

Trading strategy: Buy Adobe stock on weakness to its monthly, quarterly, semiannual, and annual value levels at $403.44, $349.18, $337.11, and $289.12, respectively. Reduce holdings on strength given the elevated stochastic reading. 

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for June was established based upon the May 29 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

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 shares 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 their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting 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 the 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. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.