Adobe (ADBE) Breaks Out to All-Time High

Adobe Inc. (ADBE) gets less attention than CATCH favorites, but the software giant’s returns have been highly competitive, gaining more than 1,800% in the past nine years. The Nasdaq 100’s tenth highest-capitalized component joined peers at all-time highs last week after breaking out above a six-week consolidation pattern. Adobe stock has already risen an impressive 38% in 2020 and could add substantially to those gains in coming weeks, lifting above the psychological $500 level.

Key Takeaways

  • Last week’s breakout opens the door to a rally above $500.
  • The stock has posted a return in excess of 1,800% since 2011.
  • Adobe price action has exceeded Wall Street targets, indicating that the shares may be overvalued at this time.

CEO Shantanu Narayen noted tailwinds across all business lines in an Aug. 11 interview, confirming resurgent activity after first quarter shutdowns. Adobe recently expanded its broad technological footprint, announcing a strategic partnership with International Business Machines Corporation (IBM) and the Red Hat division to “help accelerate digital transformation and strengthen real-time data security for enterprises” through IBM Cloud services.

Big investors have grown more cautious about Adobe stock’s long-term outlook, despite strong tailwinds, with hedge funds run by Keith Meister, David Tepper, and Stanley Druckenmiller all decreasing or closing out positions. On the flip side, Dan Loeb’s Third Point just opened a 670,000-share stake, while Wall Street analysts have maintained a rock-solid “Strong Buy” rating based upon 16 “Buy” and just 5 “Hold” recommendations. However, Adobe stock is now trading above the Street-high $474 price targetsignificantly raising the odds for downgrades.

Hedge funds are alternative investments using pooled funds that employ different strategies to earn active return, or alphafor their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Adobe Long-Term Chart (2007 – 2020)

The stock failed a breakout above the 2000 high at $43.65 in 2007 and sold off to a six-year low during the 2008 economic collapse. It bounced back to resistance in 2013 and broke out, entering a historic advance that held within a narrow rising channel into a 2017 breakout that escalated price rate of change statistics. The uptrend finally stalled in the third quarter of 2018, giving way to the first intermediate correction since 2016.

A June 2019 breakout failed in August, but the stock recovered quickly, posting new highs once again in December. This buying impulse topped out at $386.84 in February 2020, giving way to a steep decline that posted a 52-week low at $255 in March. The subsequent recovery wave unfolded at the same angle of attack as the prior decline, completing a V-shaped pattern into the prior high in May.

Adobe Short-Term Outlook

A June breakout made rapid progress into the July high at $470.61 and eased into a symmetrical triangle pattern that finally broke to the upside last week. The stock posted an all-time high at $481 in Monday’s pre-market session, just 19 points below $500, which marks the first upside target. Given strong momentum in this late-summer rally, the uptick could easily exceed that level and trade higher through September.

Even so, overbought technical readings could come into play in coming weeks, with the monthly stochastic oscillator now situated at the same level that preceded the first quarter selloff. In addition, price action has now stretched outside the top of the 20-month Bollinger Band® for the second month in a row, indicating that gains may be unsustainable while increasing the odds for a decline that undercuts the $400 level.

A Bollinger Band® is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security’s price but which can be adjusted to user preferences.

The Bottom Line

Adobe stock has broken out above six-week resistance and could now rally above $500.

Disclosure: The author held no positions in aforementioned securities at the time of publication.

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