The stock market crash of 2007-2009 did not spare Adobe Systems Inc. In September 2007 the stock was trading close to $50 a share. In March 2009 it bottomed at $15.88. However, the bulls have been so persistent ever since, that the hard times have been forgotten long ago. Last week Adobe closed at $78.55 per share, which is an all-time high. But even the strongest of trends are interrupted by corrections in the opposite direction. The chart below will show you why we think Adobe is ready for one.
The Elliott Wave Principle states that the direction of the trend is indicated by five-wave sequences, called impulses. But, as visible, there are only three waves on the chart of Adobe Systems Inc. so far, labeled (1)-(2)-(3). Should we expect wave (4) to the downside soon? In order to answer this question, we have to see if wave (3) is nearing its end. We can do that by checking its wave structure and length. Wave (3) is supposed to be impulsive. We can see all the necessary waves 1-2-3-4-5 clearly on the chart. In addition, wave 5 looks like an ending diagonal, which is a reversal pattern. So, the wave structure says wave (3) could be over soon. What does the length say? Third waves usually travel 1.618 or 2.618 times the length of the first wave. Adobe’s third wave would reach the second of these two Fibonacci levels at $81. It is almost there. Conventional technical analysis can help here as well. The Relative Strength Index indicator shows a strong bearish divergence between wave 3 and 5 of (3), so we have one more reason to expect a pull-back. But how deep? Fourth waves tend to find support in the zone of previous fourth waves. In this case, wave 4 of (3) ended near $60. That is why we anticipate a 20-dollar drop from around $80 to around $60. But how is this drop going to look like? The guideline of alternation postulates, that if the second wave is sharp, wave four should be a sideways retracement. Adobe’s wave (2) is a sharp zig-zag correction, so we believe wave (4) would be either a flat or a triangle. In conclusion, we do not think now is the right time to buy Adobe Systems Inc. stock, since there is a good chance for a significant decline soon.
