The stock is falling because investors are focusing on the revenue projections. Adobe projects Q4 revs of $0.950-1.000 bln vs. $1.03 bln consensus.
Our fundamental view on Adobe has been positive. After analyzing the earnings report and projections with a fine tooth comb, our fundamental view on the company remains positive. The stock passes all six screens of the ZYX Change Method. We have been waiting for a trigger signal and today’s drop provides the entry trigger.
The extreme downside reaction is not fundamental based but simply a function of trapped bulls panicking and selling. The street has been wildly bullish and wrong. As an example, several analysts were out during the day with their expectations of better than expected earnings. Analyst’s bullishness has been reflected in a very small short-base at 2 days to cover, with only 2.3% of the float short.
As the weak longs sell, we will be on the other side. We suggest scaling in a 5% position around $27.60 in the after hours. So far after hours volume is 10,624,810 shares and bid/ask spread has stayed tight, entering a 5% position in after hours should not be a problem. As per the ZYX Change Method trade management guidelines, our buy zone is down to $24.50. Lower the stock goes, more aggressive we will become in adding to our position. Stop zone will be $21.90 to $23.80.
We recommend selling puts to add to the returns, but not violating the strict discipline of the maximum position size. We also recommend trading around the core position to add to the returns. We will start taking partial profits around $29.
