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One of the world’s biggest tech expos – the Consumer Electronics Show (CES) – kicked off this week in Las Vegas.
And for the 130,000-plus expected to attend, you can be sure the predominant theme will again be artificial intelligence (AI).
Many companies exhibiting at the event are incorporating AI into their platforms and products.
One of the main attractions, of course, is the unveiling of Nvidia’s (NVDA) latest AI-related products. NVDA has benefited enormously from the AI boom, generating loads of cash.
But the exhibitors at the show will have one big question hanging over them…
Are all the billions they’re collectively putting into AI turning into profits?
Last month, we checked out digital content publishing giant, Adobe (ADBE) – a company that is already adapting its products to take advantage of AI.
But despite beating Q4 revenue and earnings forecasts, ADBE shares tanked when management lowered its forecasts for future growth.
Today, I want to check in on ADBE again to see how things could play out from here…
Slower Growth
The chart below shows how ADBE gapped lower after announcing Q4 earnings…
When we looked at ADBE on December 17 (orange arrow), ADBE had lost around 15% in just two days. It sank around 27% lower than its February 2024 yearly high.
Adobe (ADBE)
Source: e-Signal
That sharp down move coincided with the Relative Strength Index (RSI) slumping from overbought to near oversold territory as buying momentum collapsed.
Despite ADBE being a beneficiary of AI, the market punished it severely. It was a reminder that stocks priced for perfection are vulnerable to a correction when that growth slows down.
As I wrote at the time, a fall like this can tempt you to try to pick the bottom. But I warned that “catching knives” is almost a surefire way to lose money.
Instead, you have to be patient and wait for the right setup to catch a rebound.
That means waiting for the RSI to form a ‘V’ and rally out of oversold territory.
And this has proved to be the right call…
ADBE has continued to drift as momentum stayed weak. Had we tried to catch the falling knife, we would have lost money.
So what should we look out for from here?
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Looking for Reversals
ADBE has continued to make lower lows (upper green line) while the RSI has flatlined (lower green line).
Take another look:
Adobe (ADBE)
Source: e-Signal
When price and RSI converge like this, it can often precede a change in direction. The key, as I mentioned, is for the RSI to rebound higher, causing ADBE to bounce.
That’s the move we have to be patient and wait for. It’s almost impossible for a stock to fall if momentum bounces and continues to rise.
Keep in mind that we don’t need a major reversal. Instead, we’re looking for a stock that has become overstretched to snap back the other way. That’s how we can profit.
And Adobe may be a sign of the times for AI stocks…
More companies could struggle this year if they’re not converting their AI hype into cash. I suspect we’re going to see more sharp reversals going forward.
So this could be an important pattern to watch for this year. We can catch these reversals when overhyped stocks become overbought. And just as importantly, we can profit from any rebound when they get sold off too far.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict