Adobe's Massive Head-and-Shoulders

08/04/05 01:21:08 PM

by Arthur Hill

While the Nasdaq moved higher over the last few months, Adobe (ADBE) has languished and formed a large bearish reversal pattern.

Security: ADBE
Position: Sell

Nasdaq moved to a new high for the year on Tuesday, but ADBE remains well below its 2005 high. You do not need a price relative chart comparing ADBE with Nasdaq to figure out that Adobe is underperforming. The discrepancy is blatant -- a 2004 leader has become a 2005 laggard.

The price pattern over the last eight months looks like a large head-and-shoulders reversal. The left shoulder formed in Dec-04, the head in Mar-05 and the right shoulder in May-05. The neckline slopes down and marks support between 25 and 26. The downward sloping neckline reflects the lower lows over the last few months and these show increased selling pressure.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

I am more inclined to mark support around 26-27. This is confirmed by the last three reaction lows. A move below the low of the support zone would be enough to confirm the head-and-shoulders and target further weakness towards the next support level around 20.

Momentum confirms weakness. MACD formed a large negative divergence in April and moved below its signal line in mid-April. The indicator has trended lower for thrree and a half months and recently crossed into negative territory. As long as MACD remains below its signal line, the outlook is for further weakness. A move above the signal line would give ADBE and the head-and-shoulders a reprieve.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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