Adobe Stock Sets New High on Earnings but Is Extremely Overbought

Adobe Inc. (ADBE) remains a popular play on cloud computing, but investors must recognize that this software company is a play on technical momentum and is not a value stock. The stock traded to a new all-time intraday high of $334.80 on Jan. 2 on strength following an earnings beat reported on Dec. 12.

As we enter 2020, my proprietary analytics generated new technical levels for every stock in the universe including Adobe. The charts below will show the key levels as the new year begins. For Adobe, we have a wide range between value levels and risky levels, which warns of extreme volatility as 2020 begins.

The stock closed last week at $331.81, up 61.9% from its Dec. 24, 2018, low of $204.95. The stock is not cheap, as its P/E ratio is elevated at 51.37 without offering a dividend, according to Macrotrends.

The daily chart for Adobe

Daily chart showing the share price performance of Adobe Inc. (ADBE)
Refinitiv XENITH

The daily chart for Adobe shows the formation of a "golden cross" on March 15, 2019, when the 50-day simple moving average (SMA) rose above the 200-day SMA to indicate that higher prices lie ahead. This signal almost reversed on Nov. 8, but the 50-day SMA rose instead of declining. When under a "golden cross," the strategy is to buy weakness to the 200-day SMA, which was doable on Sep. 26 when the average was $270.88.

The close of $329.81 on Dec. 31 was an important input to my proprietary analytics. The stock is above its monthly value level for January at $304.58 and above its annual value level at $289.12. Its first half semiannual risky level is above the chart at $337.11. Its first quarterly risky level at $369.89 is also above the chart.

The weekly chart for Adobe

Weekly chart showing the share price performance of Adobe Inc. (ADBE)
Refinitiv XENITH

The weekly chart for Adobe is positive but extremely overbought, with the stock above its five-week modified moving average of $314.32. The stock is well above its 200-week SMA, or "reversion to the mean," at $194.67, 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 93.34, up from 91.65 on Dec. 27. This puts the stock above the 90.00 threshold, which is defined as 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 and annual value levels at $304.58 and $289.12, respectively, and reduce holdings on strength to semiannual and quarterly risky levels at $337.11 and $369.89, respectively.

How to use my value levels and risky levels: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual, and annual levels. Each uses the last nine closes in these time horizons. New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. 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 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 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 typically is 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.

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