Nobody is questioning the business prospects of Adobe (NASDAQ:ADBE). But on the price chart, ADBE stock’s longevity and top-dog status among the bulls is looking tenuous at best. Let me explain.
Wall Street loves Adobe stock. The analyst community collectively has 17 buys on the company behind ever-present products such as Photoshop, Acrobat and Illustrator. The staunch support has manifested itself into a median price target almost 6% above yesterday’s $283.55 close.
Want more? The Street’s $340 high estimate is 20% removed from today’s levels and 17% north of Adobe stock’s all-time-highs set in early May. Mind you, those heady expectations are despite shares having enjoyed a rally of around 300% since 2016 and a massive return for its investors of about 1,650% over the last decade.
At the other extreme? Currently, there’s not a single sell recommendation on Adobe stock.
Most recently and backing the Street’s enthusiasm, ADBE’s CEO enjoyed a bit of cushy armchair talk on CNBC’s Mad Money. The interview highlighted the company’s enviable position within secular trends for design and creativity, emphasized Adobe’s exposure to the trade war is “fairly minimal” and the outlook for 2019 looks strong.
And away from the cameras? Adobe’s soon-to-be-released Photoshop Creative Cloud for the Apple (NASDAQ:AAPL) iPad is the latest innovative tool backing up the upbeat talk.
Nevertheless, when I see a picture or chart illustrated like Adobe stock’s below, there’s good reason to be more cautious than carefree.
Adobe Stock Monthly Chart
Click to Enlarge
What concerns me are indications of price and pattern weakness emerging on Adobe stock’s longer-term monthly chart. A two-candlestick reversal formation centered on the 2018 all-time high is developing. This pattern is closing in on a bearish signal to short ADBE stock below April’s low of $263.72. The formation also maintains a supportive, weak-looking stochastics set-up.
At a minimum, for investors that have participated in Adobe stock’s burly rally, confirmation of a top should be used for profit-taking as the chances for a much larger correction increases.
Adobe Stock Short Strategy
For investors who are comfortable shorting, as mentioned, I’d wait for pattern confirmation as ADBE stock trades through $263.72. Using a pattern breaking stop-loss above $291.71 amounts to short exposure of about $28 or roughly 11% stock risk.
Alternatively, if a short in Adobe stock signals, a tighter exit above the September high of $277.61 equates to reduced risk of around 5%. That kind of price action could be enough of an indication our technical concern was misplaced.
On the downside and if conditions allow for a top to play out, the “X” on the ADBE stock chart marks the spot or more aptly, ‘illustrates’ where I see the first layer of substantial support. This is backed by a key Fibonacci trend-line at the December lows. Shorts would also be looking at solid open profits versus the position’s initial risk. As much, this area makes a good choice for taking partial profits or maybe even giving Adobe stock a second look for an entirely new position.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
