Thursday's Market Minute: Adobe's A.I.-Driven Rally Slowing Before Today's Earnings

Adobe ADBE reports earnings after today’s closing bell, with shares only about -3% below their 52-week high as of yesterday’s close. Like many other tech names, this stock enjoyed a boost from the artificial intelligence boom. Adobe shares gapped up +3.4% after the company announced plans to monetize its Firefly content-creation generative A.I. models on Jun. 8, and the move continued into a roughly +26% rally since then.

Price action has transitioned from a steeper uptrend starting with the May lows near 332 into a shallower upward channel beginning with the previously mentioned gap up on Jun. 8. Overall, the trend still looks positive. Price is trading above commonly followed moving averages such as the 21-, 63-, and 252-day Exponential Moving Averages, all of which are still sloping upward.

But momentum indicators reflect a slowdown in the pace of the gains. The Relative Strength Index (RSI) shows gradually slowing (but still bullish) momentum for most of the time since the June gap up, exhibited by a downward sloping trendline ever since its highs on Jun. 16. This is known as bearish divergence, as price is making new relative highs while RSI is trending downward. Bearish divergence does not necessarily mean a downturn is imminent; rather, it means to be on the lookout because the rate of change of the stock is waning, so many traders likely will be looking to earnings to provide a new directional catalyst. 

If Adobe’s earnings disappoint, look for potential support first at the 21-EMA near 543 as of yesterday’s close, and then at the upward trendline that begins with the June gap and comes in around 528. However, if the move goes to the upside, look to the top of the channel near 585, and then the yearly +1 Standard Deviation Channel (which can be used to project potential resistance when a stock is making new highs) at about 600.

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