Adobe Upside Looks Limited Despite Solid Quarter (ADBE)

Adobe Systems Incorporated (ADBE) rallied to an all-time high near $148 in Wednesday's pre-market after a blowout quarter that exceeded profit and revenue estimates. However, gains may be limited in coming sessions because the stock has already rallied more than 40% so far in 2017 and is technically overbought, in need of a consolidation that shakes out weak hands. As a result, market players may wish to shake off short-term euphoria and avoid new long positions.

There is no argument against the fact that this major tech player is prospering in the rapidly changing digital environment, as evidenced by its solid third quarter guidance. However, the growth story has been in place for months, drawing in a large population of buyers who are now more likely to take profits than add to positions, increasing odds for a bull trap that could signal a long-term top. (For more, see: Adobe's Cloud Push Fuels Profit Beat, Shares Surge.)

ADBE Long-Term Chart (1993 – 2017)

Desktop publishing drove growth in the last millennium, generating an uptrend that lifted the stock from one buck in 1990 to a 2000 high at $43.65. Adobe sold off with the tech universe when the dotcom bubble burst, descending to a three-year low in the single digits in the second half of 2002. The subsequent uptrend finally reached the prior high in 2006, where a buzzsaw of selling pressure triggered a major reversal that relinquished nearly 40% of the stock's value in just six months.

A 2007 rally into multi-year resistance yielded a minor breakout that added just five points, ahead of a downturn that triggered a major failure swing in the first quarter of 2008. The stock held its ground into October and then plunged with world markets, dumping to a five-year low in the teens in March 2009, ahead of a recovery wave that stalled at the .618 Fibonacci sell-off retracement level in the mid-$30s at the start of the new decade. (See also: Strategies for Trading Fibonacci Retracements.)

It took nearly six years to clear resistance and reach the 2007 high, ahead of a 2014 trend advance that lifted the stock in narrow-channeled action that accelerated at the start of 2017 when it broke the rising highs trendline in place for nearly three years. This technical event signaled unusual relative strength that set the stage for a vertical advance that has added nearly 30 points in the past three months.

ADBE Short-Term Chart (2015 – 2017)

Four V-shaped patterns between 2014 and 2016 shook out weak-handed players while retaining a rally trajectory that posted a long series of new highs at the same time that the broad tech sector struggled in an intermediate correction. Volatility eased in the second half of 2016, ahead of a positive feedback loop that broke trendline resistance in February 2017, generating the most prolific gains so far in this bull market cycle.

However, volatility has increased once again, with two deep dips in the past six weeks signaling overbought technical conditions that could end this phase of the secular uptrend. If that analysis is correct, post-news bullishness will fade quickly and give way to two-sided price action that reflects aggressive short sellers determined to end the current advance at or below $150.

On-balance volume (OBV) highlights the potential conflict, lifting through a series of new highs into May and turning sharply lower into June. In turn, that shines a spotlight on volume in the next few sessions, because an indicator advance to new highs will signal extraordinary buying power that could overcome growing technical headwinds. More likely, the effort will come up short, yielding complex range-bound action that lasts well into the third quarter. (See also: On-Balance Volume: The Way to Smart Money.)

The Bottom Line

Bulls are stepping up to buy Adobe shares after a strong second quarter and positive third quarter guidance, but overbought technicals suggest the uptrend will fail to gain traction, yielding a correction or broad trading range that denies easy profits to trend followers.

<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>