Bulls in Control Ahead of Adobe Earnings

Nasdaq 100 component Adobe Inc. (ADBE) reports earnings next week, with analysts expecting profits of $1.97 per share on $2.82 billion in third quarter revenue. The stock rose more than 3% after the software company beat second quarter estimates but lowered quarterly guidance in June's confessional, and the shares lifted to an all-time high above $300 in July. It has pulled back more than 10% into September and is now trading near $278, close to the closing print just prior to the June report.

This is a beneficial position for bulls, with the correction reaching support at the June breakout and 200-day exponential moving average (EMA). Taken together with oversold technical readings, market players will be looking for a strong buy-the-news reaction that could stretch 25 points and confirm the breakout, setting the stage for new all-time highs. However, there isn't much wiggle room because a relatively minor sell-off will complete a failed breakout that presages much lower prices.

ADBE Long-Term Chart (1990 – 2019)

A multi-year uptrend posted respectable gains in the first half of the 1990s, finally topping out at a split-adjusted $9.28 in 1996. It cleared that resistance level in 1999, entering a parabolic rally impulse, driven by the final phase of the internet bubble. The rally ran out of steam at $43.65 in the fourth quarter of 2000, giving way to a complex correction that found support in the single digits in August 2002.

The subsequent recovery wave stalled just three points below the 2000 peak in 2006. It mounted that level in the summer of 2007 but made little progress, topping out at $48.47 a few months later, ahead of a downturn that accelerated during the 2008 economic collapse. The stock posted a six-year low in the mid-teens when the dust settled in 2009 and turned higher into the new decade, stalling in the upper $30s. 

Positive but subdued price action finally cleared the 2007 resistance level in 2013, generating a historic trend advance that added points at a rapid pace into the October 2018 high at $277. It then rolled into the first pullback since 2016, finding support quickly near $200, and turned sharply higher into 2019. The June breakout mounted $300 for the first time, with that round number still grinding through a testing phase as we head toward the fourth quarter.

The monthly stochastics oscillator hasn't dropped into the oversold level since 2011, highlighting unusual strength while confirming Adobe's status as a market leader. It crossed into a new sell cycle in July 2019, but it is best to discount the value of this bearish signal, given the wave of aborted sell cycles between 2012 and 2018. In any case, the next uptick will tell the tale, with a bullish crossover or a confirmation that the stock has entered a deeper correction.

ADBE Short-Term Chart (2017 – 2019)

A Fibonacci grid stretched across the uptrend since December 2018 places current action near the .382 retracement level, which has aligned with the breakout and 200-day EMA. This reinforces already strong support, raising the odds for a bullish reaction to next week's news. A minor slide to $270 wouldn't hurt bulls in this price structure, but a high-volume decline through that level would expose continued downside into the .618 retracement level below $250.

The on-balance volume (OBV) accumulation-distribution indicator broke out with price in June 2018, posting an all-time high in July. The distribution phase since that time looks like a garden variety correction, with most shareholders holding onto positions because they expect new highs in coming months. In addition, OBV looks even stronger than the price pattern, with the next downdraft still holding breakout support. This also bodes well for Adobe's future.

The Bottom Line

Adobe Systems is sitting on major support ahead of next week’s earnings report, which may trigger a strong buy-the-news reaction,

Disclosure: The author held no positions in the aforementioned securities at the time of publication.