{"id":199624,"date":"2023-12-01T09:14:29","date_gmt":"2023-12-01T14:14:29","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=199624"},"modified":"2024-01-24T13:54:02","modified_gmt":"2024-01-24T18:54:02","slug":"chart-advisor-adobe-approaching-all-time-highs","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/chart-advisor-adobe-approaching-all-time-highs\/","title":{"rendered":"Chart Advisor: Adobe Approaching All-Time-Highs"},"content":{"rendered":"\n

By Adam Koos, CFP, CMT, CEPA<\/a><\/p>\n\n\n\n

1\/ Screening New Candidates<\/strong><\/p>\n\n\n\n

2\/ Adobe on the Move<\/strong><\/p>\n\n\n\n

3\/ Relative Rotation Graph<\/strong><\/p>\n\n\n\n

4\/ McDonald’s Potential<\/strong><\/p>\n\n\n\n

5\/ Broadening Your Inventory<\/strong><\/p>\n\n\n\n

Investopedia is partnering with CMT Association on this newsletter.  The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.<\/em><\/p>\n\n\n\n

1\/ Screening New Candidates<\/strong><\/h2>\n\n\n\n

Before I close out my final column this week, I want to thank all the subscribers who took the time to read the articles I wrote for Investopedia this week \u2013 and with that, I also want to thank Investopedia for the honor in asking me to be a part of such a wonderful, educational initiative.<\/p>\n\n\n\n

We started the week discussing the stock market, and then the bond market, and finally international stocks, all from a 30,000-foot view.  We then went into comparing the different asset classes to find strength and momentum \u2013 places we likely want to invest our hard-earned money (i.e., \u201cthe playoff teams\u201d) \u2013 all while avoiding the basement-dwellers and bottom-feeders.<\/p>\n\n\n\n

Today, we\u2019re going to use some of what we\u2019ve learned and put a cherry on top, going over some screening techniques to find new potential buying candidates.  While there are several ways to find good investment to buy, keep in mind\u2026 we only have time (or should I say \u201croom!\u201d) for a few charts here, so feel free to reach out<\/a> if you have any specific questions!<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Many relative strength (RS) studies have shown that the investments which exhibit the highest RS tend to continue outperforming over the intermediate-term.  Furthermore, there are other studies that show how many investments that have outperformed over the course of a 2-3 year period, tend to under-perform<\/em> over the course of the following<\/em> 2-3 years.<\/p>\n\n\n\n

We already know (from the charts I shared earlier this week on Investopedia\u2019s Chart Advisor) that the U.S. is still the place to be in terms of asset class exposure.  For this reason, as well as the studies mentioned above, this first chart uses an inventory of U.S. sectors and industry groups and ranks them using a 26-week rate of change. <\/p>\n\n\n\n

Six months (or 26 weeks) is a nice, sweet spot for RS when coming up with buying candidates, so if you\u2019re looking for some good, domestic \u201cbaskets\u201d of stocks (i.e., ETFs), this is a great way to do it.<\/p>\n\n\n\n

The next step would be to go thru each of the charts in the top quartile (or so), analyzing each chart individually, and determining whether it would be a good potential buy for you.  The top-ranked ETF in the screen just happens to be the Global X Uranium ETF (URA), and you can see how it has a rising 50-day moving average, and recently (in the lower-pane) RSI(14) crossed above 70, which indicates the position has entered a bullish momentum regime.<\/p>\n\n\n\n

Once you get to this juncture, you\u2019d want to put an exit strategy in place\u2026 whether it be a moving average, a floor of potential support, or you could also use a ranking system.  For example, if a position you own falls into the 6th decile of the inventory (which suggests is strength is weakening \u2013 and it might not make the metaphorical \u201cplayoffs\u201d this year), then you would eject that position and replace it with something at the top of the inventory that you don\u2019t already own.<\/p>\n\n\n\n

2\/ Adobe on the Move<\/strong><\/h2>\n\n\n\n
\"\"<\/figure>\n\n\n\n

RS screens, such as the 26wROC we used in the first chart, aren\u2019t JUST for ETFs.  We can use these types of screens on individual stocks as well. <\/p>\n\n\n\n

When I ran the same screen on the S&P 500, Adobe (ADBE) came up as the #3 ranked stock on an RS-basis, amongst all of the stocks within the index. <\/p>\n\n\n\n

When you drill down and analyze the chart, you can see a rising 200 MA, a rising 50 MA, a couple good places to place a potential stop-loss (including potential support at the three lows you can see at the red-dashed line between July & October), and Adobe just happens to be closing in on its all-time-highs. <\/p>\n\n\n\n

Oh, and for those of you who are reading this, thinking to yourself \u201cI don\u2019t want to buy a stock near all-time-highs, do I?!\u201d<\/em> <\/p>\n\n\n\n

All-time-highs are not bearish. <\/p>\n\n\n\n

Humans are terrible investors, by nature.  Our emotions get in the way with every decision we make.  So, when I hear \u201cI want to wait for a pull-back before I invest my money,\u201d <\/em>what I hear is, you want to wait for prices to get lower.  Okay\u2026 fine.<\/p>\n\n\n\n

\u2026but when the market goes through a correction, like it did between July and October of this year, and I hear follow-up comments, such as \u201cWell, I want to wait for things to get better<\/strong> before I invest,\u201d<\/em> what I hear is that you want to wait for prices to get higher.  What?!<\/p>\n\n\n\n

When searching for good investment candidates for your portfolio, don\u2019t allow your emotions to fixate on getting a \u201cdeal.\u201d  Instead, understand that success in investing is less<\/em> about \u201cbuying low\u201d and a whole lot more about \u201cbuying high and selling higher!\u201d<\/p>\n\n\n\n

Full disclosure, we own ADBE in four of our client portfolio models at Libertas Wealth.<\/em><\/p>\n\n\n\n

3\/ Relative Rotation Graph<\/strong><\/h2>\n\n\n\n
\"\"<\/figure>\n\n\n\n

Another great screening tool when looking for potential buying candidates is a Relative Rotation Graph (RRG).  Invented by my friend Julius de Kempenaer<\/a> in the early 2010\u2019s, RRGs are, without question, the best way to visualize relative strength. <\/p>\n\n\n\n

The way to read these charts is simple\u2026<\/p>\n\n\n\n

The center point of the RRG (at the zero point on the x\/y axis) is the benchmark.  In this RRG, I inputted the Dow Jones Industrial Average as the index to which the RRG is comparing its components.  Then, plotted around the RRG are all 30 stocks within the DJIA index.<\/p>\n\n\n\n

When observing the arrows in the RRG, each points at the \u201cdirection\u201d the investment is headed.  Furthermore, each dot in its \u201ctail\u201d is one week, because I chose to create a weekly RRG (you can also create daily, or even monthly relative rotation graphs, but my intermediate timeframe justifies a weekly observation).  The further apart each dot is, the higher the velocity of change across each quadrant.<\/p>\n\n\n\n

Speaking of quadrants, here is a description of what each means:<\/p>\n\n\n\n