Automatic Data Processing (ADP) Could Hit All-Time High

Automatic Data Processing, Inc. (ADP) is known for handling payroll processing for small and large businesses. However, over the past few years, it's been ADP's expansion into human resources that has helped it keep up with intense competition from companies like Square, Inc. (SQ).

The pandemic this year caused ADP stock to plummet 41% before it rebounded and traded in a wedge pattern. The stock traded back and forth off those resistance and support areas up until the breakout in November. The push higher didn't get shares back to new highs, though – they stopped just short.

For the past month, ADP shares have bounced in a tight trading range between $170 and $176. Take a look:

Chart showing the share price performance of Automatic Data Processing, Inc. (ADP)

With the stock's latest period of consolidation, it's only a matter of days before we get another quick breakout. Based on the Relative Rotation Graph concept, I'm looking for a breakout to the upside.

The Relative Rotation Graph, or RRG, combines the relative strength of the stock to the S&P 500 with momentum to create a unique view on the stock. It shows that stocks rotate from leading the overall market to weakening as the momentum slows, eventually lagging the market, and then improving as momentum picks back up to come back to leading the market once again. Stocks tend to rotate in that specific order: leading, weakening, lagging, and improving.

Right now, ADP is in the lagging section of the chart and is expected to move to improving. As it does, that should help push the stock price above the $176 resistance point and have the stock hitting new all-time highs in no time. 

All the stars are starting to align for ADP just as we head into the New Year. This will likely help keep the stock on pace for a double-digit rally in 2021.

The Bottom Line

ADP stock was hurt during the pandemic and still hasn't fully recovered. After its share price consolidated for the past month, it is now set up to run past its previous peak once we get a breakout. The RRG tells us to expect a breakout to the upside, clearing the way for a strong rally in 2021.

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