Nike Inc (NYSE:NKE) has dropped around 8% over the past few trading sessions while the broader market has enjoyed an oversold bounce. While Nike stock might be oversold itself in the intermediate-term, NKE also remains in a downtrend that likely has another 10% of downside before the sellers finally become exhausted.
On Feb. 24, I shared a trade idea in this column, arguing that rallies in NKE must be sold into. A couple of days later, Nike confirmed a bearish reversal in the resistance zone between $60 and $63 that I highlighted and resumed its path lower.
While this path is unlikely to resemble a straight line in coming weeks, the weight on Nike stock should remain firm.
Before revisiting the multiyear weekly chart of NKE, I want to point out that Nike is a story of different time frames. Structurally, Nike is a leader in its segment — one that is willing to adapt and try new things. As such, the big-picture uptrend in Nike stock should be just fine. The issue with NKE is in the near- to intermediate-term, and it remains one of rate of change. In other words, Nike overextended its welcome on the upside in late 2015 and still is in need of further consolidation.
In the near-term, we can look at this as a corrective phase.
Nike (NKE) Stock Charts
Looking at the multiyear weekly chart, we see Nike’s overshooting move from the fourth quarter of 2015, which broke it out of a defined and already steep multiyear uptrend. This move came with less upside momentum, thus it was just a matter of time until NKE would settle into a mean-reversion move lower. Nike stock has since fallen back into its multiyear uptrending channel, which is a good start.
However, please write this down: Stocks that overshoot on the upside tend to overshoot on the downside. For NKE stock, this could mean that after shooting above the upper resistance line, it could well undershoot or break below the lower trendline before this corrective phase has run its course.
On the daily chart, we see that when NKE stock topped out at its most recent oversold bounce on Feb. 26, it did so at confluence resistance. This confluence resistance area was made up of the blue 100-day simple moving average and the black diagonal resistance line (former support), all of which also coincided with a 61.8% Fibonacci retracement of the move from the December 2015 highs into the recent February lows.
Active investors and traders should remain in “sell the bounce” mode but not chase the selloffs too much. In the options market, this would mean either buying cheap puts on bounces or selling out-of-the-money call spreads, the former of which allows for a wider margin of error if constructed properly.
Ultimately, Nike stock stands a good chance of further mean-reverting lower into the mid- to high $40s.
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