The U.S. stock market continues to trade in a choppy fashion, and while I am still waiting for true high probability setups to rear their heads, more candidates are popping up on my radar. One stock that has notably held up better than its sector is Adobe Systems Incorporated (NASDAQ:ADBE), which despite a little pullback over the past few trading days is still higher by more than 20% for the year.
Regular readers of this here column are no doubt aware of my multi-time-frame approach to analyzing markets. Each day I post a trade idea using both a daily as well as a bigger-picture chart so as to gain best possible perspective for risk managing any trade idea.
One important component to this analysis is the use of so called “relative charts” or “ratio charts.” These charts peg one asset versus another and show us the numerator’s relative strength or relative weakness compared to the denominator. I often do this exercise within as well as across asset classes to see where money is flowing in the markets.
In today’s trade idea on the second chart below you will see me using a “ratio chart” to compare ADBE stock to the technology sector that it belongs.
Adobe Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Much like many large cap technology stocks ADBE stock has seen a near vertical ascent in 2017 if looked at through the multiyear lens. Note that the orderly multiyear up-trend steepened dramatically coming into 2017 and as a result pushed the stock well above its intermediate term moving averages and currently still has the MACD momentum oscillator at record highs.
While I understand and respect the growth components that investors pay up for in ADBE stock, as a longer-term buy entry point this current juncture strikes me as less than optimal considering that a better mean-reversion move lower is likely in the cards through a multi-month/quarter lens.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart we see that since steeping its rally further over the past two quarters ADBE stock has roughly found support at its yellow rising 50 day simple moving average. Earlier this week on April 2nd the stock once again bumped into this moving average and promptly bounced.
The blue line at the bottom of the chart is the ratio chart where I divided ADBE stock versus the technology sector ETF. Clearly the stock has held up better than its sector, i.e. exhibited relative strength.
Given the bump into the 50-day moving average and the continued relative strenght of the stock, active investors and traders could look to buy ADBE stock around the $215 area using the $207 area as a stop loss and an initial upside profit target at $230. More risk averse traders could look to wait for a follow-through buying day (a solid up-day) following this week’s bump into the 50 day moving average before legging into this trade.
Check out Anthony Mirhaydari’s Daily Market Outlook for April 4.
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