Shares of payment processing company Automatic Data Processing (NASDAQ:ADP) have dropped about 7% over the past two weeks in response to its May 3 earnings report. While ADP stock is largely in a well-defined uptrend through a multiyear lens, for the near-term, there’s a well-defined line in the sand that active investors and traders can use to their advantage.
For its most recent quarter, ADP beat analyst expectations on the top and bottom lines, and both were higher on a year-over-year basis. The company also raised its dividend from 53 cents to 57 cents for a current dividend yield of about 2.4%.
However, investors were disappointed in ADP’s fiscal-year forecast that global new business bookings will likely decrease 5%-7%. Previously, the company had guided new business bookings as flat YOY.
Let’s dive into the charts.
ADP Stock Charts
On the multiyear chart we see that Automatic Data Processing has largely pushed higher in a well-defined uptrending channel for the past few years.
The upper end of this channel was recently rejected, and ADP stock is now trading just below the middle of the channel. Note that the lower end of the channel is also supported by the 100-week simple moving average (blue).
When it comes to trend following techniques, there are usually two ways to trade these trends. One way is to buy the lower end of the trend and take partial or full profits once the stock has worked its way back to the upper end of range. The other way is to “fade” the trends for pure trades (i.e., short or make otherwise bearish bets on the stock once it reaches the upper end of range, then cover those bets at the lower end of range).
Currently, because ADP is not yet at the lower end of the range, but rather somewhere in the middle, I’m calling for a more tactical approach.
On the daily chart, we see that as a result of the last two weeks of selling pressure, ADP stock has arrived at an area of technical confluence support.
Specifically, the support are is made up of horizontal support from last December and this past February. Note that this area around the $95-$96 area formerly acted as resistance.
Furthermore, this juncture is now also intersected by the 200-day simple moving average (red). In other words, there is plenty of technical support to play the stock higher from here for a bounce, particularly as a break below this support area would serve as a clear stop-loss signal. So, risk is very well-defined.
On Friday, May 12, ADP started staging an initial bounce, triggering an early B2 Reversal Buy signal (my proprietary trading indicator that works on multiple trading platforms).
I would still like to see the stock push and hold above $97.50 before buying it. But if and when that does occur, a move back into the $100 mark could serve as a next upside target.
The $95.60 area is a well-defined stop-loss area. If this area is broken, that could set up a short-side trade into the low $90s for more aggressive traders.
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