When tech stocks began their big rally at the start of the year, one of them barely moved.

For the first five months of 2023, Adobe (ADBE) traded sideways. Even a promising rally following its Q1 earnings beat soon fizzled out.

Yet that all dramatically changed in May…

In just five weeks, ADBE gained a massive 57%. Its market cap soared to almost a quarter of a trillion dollars.

Now ADBE is trading well into overbought territory. And even another earnings beat last week couldn’t sustain its rally.

So after its big run-up, today I want to see what’s in store from here…

Repeating Patterns

Adobe fell 61% from its late 2021 all-time high to October last year.

It then began to build a base as the Relative Strength Index (RSI) rallied from oversold territory (left red line at “A”).

Adobe (ADBE)

Source: eSignal

The RSI bullishly broke into its upper range above the green line. But there was not enough momentum to drive a rally.

Instead, the RSI bounced along support. That caused ADBE to trade in a tight sideways pattern as we came into 2023.

The 50-day Moving Average (MA, blue line) flatlined through May as well. The 10-day MA (red line) shows that ADBE had minor swings during this time.

Retracing in late February, ADBE found a base with a repeat of the RSI’s previous pattern at “A” (middle red line at “B”).

The rally initially looked promising with ADBE’s Q1 earnings results helping to push the RSI into positive territory. But that move petered out…

ADBE then retraced in May as the RSI fell back into the lower half of its range.

The RSI pattern then repeated yet again (right red line at “C”). And ADBE developed another base and began to rally.

Take another look:

Adobe (ADBE)

Source: eSignal

As you can see, this time ADBE’s rally had some teeth. That breakout rally coincided with two bullish signals:

1. The RSI rose strongly into the upper half of its range.

2. The 10-day MA jumped at a sharp angle above the 50-day MA and then accelerated higher.

Yet while ADBE has made higher highs, the RSI has started to run into resistance (orange line).

ADBE announced another earnings beat for Q2. Its stock price opened higher… but then spent the rest of the session falling as traders banked their profits.

So with ADBE still looking overstretched, what can we expect from here?

Look for a Pullback

When a stock rallies as fast as ADBE has this past month, it can become like a stretched rubber band.

Although the overall longer-term rally might remain intact, that overshoot can often cause a short-term retracement.

And that’s what I’ll be looking for around here.

If the RSI breaks lower toward support, then we can expect a short, sharp pullback from ADBE.

ADBE could soon trade back at around $440–450. Any down move beyond that would depend on the RSI tracking back into the lower half of its range.

Longer-term, we also need to keep a watch on our MAs.

The 10-day MA retracing toward the 50-day MA would add further confirmation of any bigger down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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