Shares of Adobe Systems Incorporated (NASDAQ:ADBE) rallied sharply last week after the company reported its latest financial results. However, through the lens of chart analysis, this rally has pushed ADBE stock to its limits on the upside. Now, chasing it higher sounds like a low-probability strategy.
It has been a while since I’ve seen a setup like the one in ADBE stock, but when I do find one of these specific high-probability setups, I try to write about it here in this daily column o’ mine.
The setup in specific is what I refer to as the “gravity pull” setup, and it refers to stocks that have gone into vertical overshooting mode where they took an already steep uptrend into a vertical leap higher.
As we will see on the two charts of Adobe stock below, when I come across a stock setup like this, my go-to strategy is to either short the stock, buy cheap put options or option spreads, or if implied volatility is high enough, I will even consider selling out-of-the-money call spreads.
ADBE Stock Charts
On the multiyear chart, we see that ADBE stock over the past few years has traded steadily higher in a well-defined uptrend, which apart from a couple of swings below trend in 2014, 2015 and 2016, managed to hold very well.
Starting in late November 2016, Adobe embarked on a new rally leg that by January/early February broke the stock decisively above and out of the longer-standing multiyear uptrend.
This move alone is ultimately likely to lead to a correction phase that should retest the upper end of the multiyear uptrend.
On the daily chart, I highlighted this recent multimonth rally with the two black lines which some may label as a rising wedge formation that ultimately may correct lower.
Last Friday, following the earnings announcement — in which Adobe reported results that were largely better than what investors had expected — ADBE stock gapped higher and rallied even further.
As a result, it broke above the steep multi-month rally and literally took the chart into vertical rally mode.
From here, active investors and traders could consider shorting Adobe stock or buying cheap puts or puts spreads, using the $130 area as a stop-loss and the low $120s as a first downside price target.
Option sellers could even consider selling out-of-the-money call spreads on the stock, although in my eyes, implied volatility is too low to warrant this strategy.
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