Adobe (NASDAQ:ADBE) stock fell 9% on its earnings headline last night. Luckily it bounced right off and cut those losses in half within an hour. Judging by the harsh reaction, one would expect that the ADBE stock earnings report was a giant miss on expectations. Well it wasn’t — in fact, Adobe reported record revenues.
However, it was only a small increase over last year’s numbers. Still, this season we’ve seen picks do much worse. So, I would consider ADBE stock hopefuls lucky today.
I analyzed Adobe’s outlook into earnings for my members yesterday. My interpretation of the options positions (or open interest) was slightly bearish this week.
The stock is tumbling now on a knee-jerk reaction. But there is evidence of prior bounce levels from the last two corrections. And therein lies my thesis for this write-up — that ADBE stock is worth catching on bad days.
Without new extrinsic headlines the propensity is for prior support to hold, so it behooves investors to carefully catch the falling knife. Wall Street is now more fickle than ever, so partial positions to start and not all in. On the way out of the pandemic, Adobe stock surged 174%. Sadly the party ended in a giant crash that resulted in it losing 41% of its value.
It finally bounced 15% just a few days ago. Luckily for the bulls that happened — now they have a bit of a buffer on this earnings drop. The indices are too close to the Feb. 24 flash low. Having room for error is important.
This also leaves all stocks vulnerable to their next correction. Because of the recent rally, Adobe’s dip is just normal price action. There is nothing fundamentally wrong with the company — expectations were simply too high. Its reputation is impeccable and it ranks among the leading tech companies. The digitization revolution is underway, and Adobe is one of the winners there.
All in all, ADBE is not a spring chicken, and it has earned its stripes. It survived the dot com bubble and thrived for decades after. A few red ticks from disappointed analysts is not going to break it.
ADBE Stock Has Solid Support
Source: Charts by TradingView
Technically, the stock has demonstrated the ability to bounce off of a very solid support level. Adobe survived an extremely tough test in the past 30 days, including headlines of war. A slight disappointment in the size of the “beat” did hurt. Therefore, smart money should be looking for entry opportunities into ADBE stock on this weakness.
This is a trading opportunity, but it can also double as an investment starter position. I expect the rally can extend 20% after this dip. However I do realize there will be resistance, especially around $480 and $500 per share.
There is also the matter of the geopolitical threats that still linger. Therefore, we should limit the trading size for now. Moreover, if Adobe fans fail to hold on above $403, it could trigger a 20% bearish pattern from there.
When there is clarity on threat abatement, we can deploy more risk. Meanwhile, ADBE stock needs the indices to not correct while it is finding footing.
Using options can simplify the opportunity especially on bad days. The CBOE volatility index (VIX) is already high, so premiums are unusually expensive. Therefore, it makes sense to sell puts for income and capitalize on fear. Selling puts is a bullish setup that leaves room for error. As long as the investor is willing to own shares, it’s even safer than buying stock outright. The worst-case scenario from this would be to own ADBE at an even bigger discount. This cushion also fits within our earlier warning of extrinsic risks.
— Nicolas Chahine
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Source: Investor Place