A dreaded 'death cross' chart pattern points to even more losses for this struggling software stock

Published Thu, Apr 11 202412:33 PM EDTUpdated Thu, Apr 11 20241:39 PM EDT

Adobe showed all the technical characteristics of a top performer during the second half of 2023. After a key breakout in May of last year, ADBE pounded out a clear pattern of higher highs and higher lows, along with consistently strong momentum and impressive relative strength. But 2024 has been a dramatically different year, with almost every bullish factor listed above reversing to a more bearish reading. This week, ADBE flashed the dreaded "death cross" signal — a pattern that typically points to further downside — with the 50-day moving average crossing down through the 200-day moving average. Is this just the beginning of a protracted downtrend for this software name? The technical evidence would suggest further downside is very much a possibility. Adobe created a classic double top pattern in January, when the stock retested the December 2023 high around $630 and failed to break above this resistance level. Price momentum has shifted to a bearish range, with the relative strength consistently below 50 over the past two months. It's worth noting that the death cross observed this week happened only after the stock had established a clear downtrend of lower highs and lower lows. This sort of moving average technique is very much a lagging indicator, meant to confirm a downtrend that has already begun. In fact, the last time Adobe flashed a death cross was in January 2022. The stock was already down about 25% from its November 2021 high when the pattern appeared, and ADBE lost another 45% in value after that bearish signal. What downside objectives can we identify based on the current setup? Let's incorporate Fibonacci retracements as a way to anticipate potential support levels, assuming this downtrend continues. Now we can see that the gap lower in March, after the Q1 earnings release, dropped the price right down to the 38.2% Fibonacci retracement level. This support level, just below $500, aligns well with the September 2023 price low. Although ADBE experienced a brief bounce higher after that downside gap, the bears regained control in recent weeks. Now that the first Fibonacci level has been broken, this would suggest further downside with potential support at the 61.8% level around $411, along with secondary support at the 50% level around $453. Back in 2022, a similar death cross resulted in an additional 45% drop for Adobe before the eventual low was established. While a repeat of that sort of extreme downtrend may seem unlikely, the bearish configuration of price action, moving averages, RSI, and relative strength suggests that investors should treat this stock as guilty until proven innocent. -David Keller, CMT marketmisbehavior.com DISCLOSURES: None THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.