Under Armour Inc (UA) — Shares of this sports apparel retailer are still nearly 20% higher on the year, but the price action since late September has been concerning. While this could ultimately lead to a larger mean-reversion move, i.e., correction, in 2016, in the near term, UA stock looks like a good short-term play for a sharp oversold bounce.
Over the past few years, UA stock has been a trend follower’s dream as every dip got bought in a systematic manner. As they say, the trend is your friend… until it ends. This simply means trend followers must remain vigilant and aware of any major longer-term trend breaks.
Looking at the multiyear chart, we see the while UA stock had already been trending higher, its uptrend began to sharply accelerate in early 2013.
The rally turned so steep that by late September UA stock once again reached the upper end of its cone-shaped range and marginally overtook its summer highs.
The price action since then has been ugly with shares falling to the lower support line in less than three months. We could see a break of this line in 2016, but the severity of the decline argues for a bounce in the near term.
Moving on to the daily chart below, UA stock has fallen 24% from its September high. Supporting a bounce is the fact that bearishness on social media trading sites is high, the MACD oscillator is reaching new lows but looks exhausted/oversold, and shares are approaching horizontal support from the summer lows.
From an investor psychology perspective, perhaps what is needed is a marginal breakdown below the summer lows near the $80 mark to shake out the last of the near-term bulls. We could then see a capitulation bottom followed by a strong bullish reversal.
If we end up getting a Santa rally in the broader market, an oversold bounce could take UA stock back into the mid- to high $80s over the next few weeks.
Like what you see? Sign up for the daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! Also, download his trading plan in the Essence of Swing Trading e-book here.
As of this writing, Serge did not hold a position in any of the aforementioned securities.
