Adobe Systems Incorporated (ADBE) rose to a new all-time high of nearly $148 in pre-market trading on Wednesday after a blowout quarter that beat profit and revenue estimates. However, gains in the next few trading days may be limited as the stock has risen more than 40% so far in 2017 and is technically overbought, requiring consolidation to get out of the vulnerable. As such, market participants may wish to shake off short-term optimism and avoid taking new long positions.
There is no doubt that this major technology company is thriving in a rapidly changing digital environment, as evidenced by its solid third quarter earnings guidance. However, the growth story has been around for months, attracting a large number of buyers who are now more likely to take profits rather than add to their positions, increasing the likelihood of a bull trap that could signal a long-term top. (For more information, see:.)
ADBE Long-term K-line chart (1993 – 2017)
Desktop publishing drove growth in the last millennium, generating an uptrend that lifted the stock price from $1 in 1990 to a high of $43.65 in 2000. When the Internet bubble burst, Adobe sold off along with the tech world, falling to a single-digit three-year low in the second half of 2002. The subsequent uptrend finally reached its previous high in 2006, when resonating selling pressure triggered a major reversal, giving up nearly 40% of the stock's value in just six months.
After rallying to multi-year resistance in 2007, a small breakout added only 5 points, and the ensuing slump triggered a major failure swing in the first quarter of 2008. The stock held steady in October before selling off to a 5-year low in March 2009 as world markets plunged, followed by a recovery wave that stalled at the 0.618 Fibonacci sell-off retracement level in the mid-$30s at the start of the new decade. (Also check out: .)
It took nearly six years to clear resistance and reach the 2007 highs, and the stock lifted in narrow channel action before a trend up in 2014 that accelerated in early 2017, when it broke the trend line of nearly three years of rising highs. This technical event indicates unusual relative strength, setting the stage for a vertical rally that has added nearly 30 points over the past three months.
ADBE Short-term K-line chart (2015 – 2017)
Four V-shaped patterns from 2014 to 2016 jolted players with weak hands while maintaining a rally trajectory that made a series of new highs while the broader technology sector struggled through intermediate corrections. Volatility eased in the second half of 2016 before breaking the positive feedback loop of trendline resistance in February 2017, producing the most prolific gains to date in this bull cycle.
However, volatility has increased again and two deep declines in the past six weeks suggest overbought technical conditions that could end this phase of the long-term uptrend. If this analysis is correct, the bullish sentiment following the news release will quickly fade and give way to bilateral price action, reflecting the determination of aggressive short sellers to end the current rally at or below $150.
On Balance Volume (OBV) highlights a potential conflict, breaking out to a series of new highs in May and falling sharply in June. In turn, this puts volume in the spotlight for the next few trading days, as a rise to new highs in the indicator would signal extraordinary buying power to overcome growing technical resistance. More likely, this effort will fall short, generating complex range-bound swings that will continue into the third quarter. (Also check out: .)
After a strong second quarter and positive third quarter guidance, bulls are stepping up their purchases of Adobe stock, but overbought technicals suggest that the uptrend will not gain traction, creating a correction or a wide trading range that would deny trend followers easy profits.