Activist investor Bill Ackman announced on Monday that his Pershing Square Capital Management hedge fund had accumulated an 8.3% stake in Automatic Data Processing, Inc. (ADP) and followed up with the nomination of three board candidates. The news had little immediate effect because speculators already bid up the stock when rumors emerged in late July, triggering a breakout that posted a series of new highs in the triple digits.

Board actions might not be successful, but Pershing's heavy-handed influence on ADP will likely be felt for months to come. The involvement of Pershing is a mixed bag because Ackman has a tarnished record, losing billions in recent years on Valeant Pharmaceuticals International, Inc. (VRX), Herbalife Ltd. (HLF) and Chipotle Mexican Grill, Inc. (CMG). Even so, ADP's long-term price chart looks highly bullish, with a long-term uptrend and a spectacular breakout supported by heavy buying volume. (See also: Ackman's Pershing Square Nominates Three ADP Board Directors.)

ADP Long-Term Chart (1990 – 2017)

 

ADP shares rallied above the 1987 high at $5.37 in 1990 and entered a powerful trend advance that continued into the November 2000 top at $54.66. The stock split three times during the ascent, highlighting impressive strength underpinned by the dotcom bubble. It turned sharply lower into 2002, losing altitude with the tech universe during the bear market and finally bottoming out in the first quarter of 2003 at a five-year low in the low $20s.

The stock underperformed during the mid-decade bull market, stalling at the .618 Fibonacci bear market retracement level in the mid-$40s in 2007. Volatility increased sharply during the 2008 economic collapse, but the stock held up relatively well, nearly getting cut in half into the October low at $27.07. Mixed action took control into the new decade, with a deep support test during the 2010 flash crash followed by a steady recovery that reached the 2000 peak in 2013. (For more, see: Activist Ackman Looks for Board Seats, Better Returns at Payroll Firm ADP.)

A breakout into 2014 attracted solid buying interest, underpinning a strong uptrend that has continued to post higher highs and higher lows into 2017. The rally settled just above $100 at the end of 2016, grinding out a triple top pattern into July's big breakout. That buying impulse reached $121.77 before reversing at a trendline of rising highs going back to 2013. An 11-point drop since that peak is currently shaking out weak hands at a rapid pace.

ADP Short-Term Chart (2015 – 2017)

 

The stock eased into a rising wedge pattern after topping out at $90.23 in March 2015, with support at steadily higher lows and resistance lifting into the triple digits at the end of 2016. The three highs posted in the first half of 2017 aligned with wedge resistance, while the Ackman-fueled advance triggered a breakout that establishes new support between $106 and $108. As a result, continued selling pressure into that price zone should offer a low-risk buying opportunity. (See also: Rumors About Ackman Investment Cause Spike in ADP Shares.)

On-balance volume (OBV) confirms heavy institutional participation, carving a steady uptrend that has matched long-term bullish price action. The July buying spike has established an indicator support level (red line) that can be used for confirmation if the price continues to lose ground in coming days. Theoretically, a pullback into that line should trigger a reversal that eventually tests the late July peak.

A Fibonacci grid stretched across the rally impulse that started in May matches the trendline analysis, with the .618 level aligned perfectly across triple top support at $105. However, the wedge trendline has now risen toward the 50% retracement at $108, which may contain the downside if aggressive buyers come to the rescue. As a result, market players may wish to pick up a first tranche near that level and double up if selling pressure continues into deeper harmonic support. (To learn more, see: Strategies for Trading Fibonacci Retracements.)

The Bottom Line

ADP shares hit an all-time high above $120 on July 31 in reaction to rumors that Bill Ackman's Pershing Square hedge fund would take a large stake. A pullback into August failed to attract buying interest when the rumor turned into reality, predicting short-term overbought technicals that could drop the stock into breakout support and generate a low-risk buying opportunity. (For additional reading, check out: Opinion: ADP Owners Cash Checks From Pied Piper Bill Ackman.)

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

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