Under Armour Inc (NYSE:UA) reported earnings on Oct. 25 before the start of trading for the day and UA stock quickly began to fall. Under Armour stock is but one of many consumer-oriented stocks that is now confirming the concerning price action of the last few months by breaking below important technical support.
As a point of reference, when I last offered my take on UA stock on Oct. 19, I pointed to the concerning price action, i.e., the inability of Under Armour stock to get out of its own way, and I warned that meaningful downside could be ahead following the earnings report. So far since the earnings report, this is exactly what has unfolded.
We will see in the charts below that price action has long flashed warning signals about UA stock and this week’s post earnings price reaction is simply a confirmation of these signals.
For its third quarter, Under Armour reported earnings per of $0.29, which were up from $0.23 in the same period one year ago and above analyst estimates. Top-line revenue was up more than 20% year-over-year and it beat analyst forecasts.
UA Stock Charts
The problem with the earnings report was all in the forecast. While the fiscal year 2016 remained on target, the CEO warned of lower growth rates in the next two years. This led any hopeful momentum stock chasers to jump ship after the report and now UA stock has gone nearly 20% lower since the earnings report.
At this point, some perspective is needed on all of this. The longer-term multi-year chart reveals that since Under Armour stock topped out in 2015, it has developed a series of lower highs.
The most prominent lower high formed this past April and with the post earnings sell-off, it has formed a lower low. However, UA stock has also reached its red 200-week simple moving average for the first time since 2010 and its downside momentum may be getting excessive.
On the daily chart, we see that as of Thursday’s close, Under Armour stock is also marginally breaking below its January lows. Although that is a great sign, when considering it through a technical perspective, the three-day drop is also looking increasingly overdone.
My primary trading rule is “don’t chase stocks up or down.” In other words, UA stock now looks to be oversold at least in the near-term, setting up two potential trades. First, upon the next bearish exhaustion, i.e., bullish reversal move in the stock, traders could buy Under Armour stock for a trade or sell out of the money call spreads for income.
Alternatively and potentially more conservatively, if UA stock begins to consolidate, any next bearish reversal lower could be jumped on by shorting the stock, buying puts or put spreads for a price target closer to $28. Whatever you do from here, however, the least probable trade is to short it into the hole. Let Under Armour stock consolidate first, catch its breath and from there, higher probability trades will set up once again.
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