Adobe Systems Reports in a Bubble Above the Cloud

Adobe Systems Incorporated (ADBE) provides software for graphic design, publishing and print production, which includes applications in the company's "Creative Cloud." The stock closed Tuesday, March 13, at $219.76 after setting a fresh all-time intraday high of $224.90. The stock is up 25.4% year to date and in bull market territory at 22.5% above its Feb. 9 correction low of $179.34. A warning is that Tuesday ended in what is called a daily "key reversal."

Analysts expect Adobe to post earnings per share of $1.43 when the company reports results after the closing bell on Thursday, March 15. The consensus from analysts is that the software giant is poised for a blow-out quarter with year-over-year growth rates of more than 50% and 20% on earnings per share and revenue, respectively. In late January, Adobe announced that the new tax law would have a positive impact on earnings. (See also: It Should Be FAAANG, Not FANG: BofAML.)

The daily chart for Adobe Systems

Courtesy of MetaStock Xenith

Adobe began 2018 well above a "golden cross" that was confirmed back on April 6, 2016, when the stock closed at $95.40. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving and indicates that higher prices lie ahead, and buying shares in response to this signal was obviously a successful investment strategy for Adobe.

The stock gapped higher on Oct. 19 when the company raised guidance for 2018. There have not been any major disappointments since then. The horizontal line is my semiannual value level of $164.57. Traders should note that Tuesday's session ended in a warning called a daily "key reversal." This occurred after the stock set an all-time intraday high of $224.90 followed by a close below Monday's low of $220.34.

(To learn more about recognizing chart patterns, check out Chapter 5 of the Technical Analysis course on the Investopedia Academy)

The weekly chart for Adobe Systems

The weekly chart for Adobe is positive but overbought, with the stock above its five-week modified moving average of $206.02. The stock is well above its 200-week simple moving average of $106.79, which is the "reversion to the mean," last crossed during the week of Oct. 13, 2012, when the average was $30.04. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 91.16, well above the overbought threshold of 80.00 and above 90.00, making the chart an "inflating parabolic bubble."

Given these charts and analysis, investors should buy Adobe shares on weakness to the 50-day simple moving average, which is rising at $198.60, and reduce holdings on strength to my projected monthly risky level of $233.56. (For additional reading, check out: 5 Tech Stocks' New Growth Engine.)