On the playing field of our stock charts, bears are showing signs of stealing ‘fourth base’ in global athletics retailer Nike Inc (NYSE:NKE) and taking NKE stock away from the defending bulls. Given the situation, a long put strategy looks to be appropriate attire for traders.
Nearly a month ago, NKE thrilled investors with its quarterly earnings report, which was punctuated by a 6% profit beat to make it 10 straight earnings toppers for NKE’s institutional-heavy investor fan base. Shares of NKE closed the next session up 3.7% to record highs.
More recent, NKE shares have received back-to-back upgrades from “neutral” to “outperform” by brokerages. Back on March 30, Robert Baird chimed in with its bullish change and investors showed their appreciation by gapping NKE shares higher and closing up by 1.%.
In Wednesday’s session a second plum and identical upward revision included a price target lift from $101 to $115 for NKE stock from analysts at Piper Jaffray.
According to Barron’s, Piper pointed to positive traction for Nike from its semi-annual “Taking Stock With Teens” survey, a permanent casualization of fashion and gross margin drivers. Investors reacted by bunting shares up 0.3%.
Now for the bad news.
NKE Trading Chart
Despite three positive catalysts over the past month, each reaction has shown waning investor enthusiasm. On the weekly view shown in our NKE trading chart this has manifested itself in a bearish divergence and crossover in the Stochastics oscillator.
Looking back over the past three years, I’ve highlighted, in yellow, four substantial bases in NKE shares as the stock gained more than 140%. No doubt the price action has been a constructive winning streak for bulls. However, higher number and unobstructed base counts of four to five, like Nike stock’s, are more prone to corrections than not.
It could be a steal of sorts for prepared bears.
Further and of late, the forementioned weakening enthusiasm in shares of NKE has also established a symmetrical weekly triangle with its apex centered on the fourth base breakout/resistance level.
Symmetrical triangles like the one in NKE stock are price-neutral patterns, but do have a tendency to resolve themselves in the direction of the existing trend. More importantly, the tightening contraction eventually resolves price action up or down and generally that movement is accompanied by momentum.
In NKE, given the high weekly base count warning, bearish Stochastics, weakening reception to good news or investors’ maybe caught up worrying about competition from Under Armour Inc (NYSE:UA); we’re inclined to see the triangle pattern breaking to the downside.
Nike Options
As the NKE trading chart also reflects, Nike options are fairly attractive right now for directional-based long premium strategies like a call or put purchase or even non-directional long strangles or straddles.
The blue implied volatility reading is just removed from three-year lows, as well priced below NKE stock’s narrowing underlying price movements; which we expect will pick up once the triangle technical pattern is broken.
Given the discussed bearish outlook and checking Nike’s options board for ideas, the Jul $97.50 put for about $2.85 establishes a breakeven of $94.65 and double in premium at $91.80 at expiration. If NKE stock moves in the intended direction sooner, rather than later in the contract’s long life, time premium will result in better results.
Both NKE implied volatility and low time decay are currently working in this contract’s favor. Additionally, the Jul $97.50 put is active for the June earnings release.
The next report, could act as another positive catalyst for bears. Realistically though, I don’t believe traders will need to wait that long. Given the technical pattern at hand, one way or the other, I’d expect a new game in Nike stock to be well underway and profitable adjustments or an early exit as having taken place.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.
