Nike Inc. (NKE) short sellers have seized control after the company met third-quarter earnings estimates but reported a worldwide sales contraction while anticipating gross margins will fall in the coming quarter. The bearish outlook confirms a highly competitive sports apparel environment, highlighted by rival Under Armour Inc.’s (UAA) 34% decline since the last trading day of 2016.

Nike scraped the bottom of the Dow component performance list through most of 2016, mired in a steep correction following many years of market leadership. Hopeful buyers emerged after the stock reversed at a 14-month low in the upper-40s in early November, generating a recovery wave that broke a trendline of lower highs in February 2017. That support level is undergoing a severe test following this week’s confessional.

NKE Long-Term Chart (1994-2017)

NKE

A powerful 1980s uptrend continued into 1992, topping out at $2.82 (post five splits) and giving way to a 1993 correction. It turned higher into 1994, breaking out above the prior high in 1996 and entering a trend advance that posted series of new highs into the 1997 peak at $9.55. That marked the highest high for the next seven years, ahead of a broad consolidation that drew the outline of an ascending triangle pattern.

A 2004 breakout failed to gain traction until 2007 when it took off in a steady uptick that topped out at $17.65 in March 2008. The stock joined world markets in the economic collapse a few months later, dropping to a 2-year low in single digits. It took just one year after the March 2009 bottom to recoup the bear market loss and return the price to the prior high, ahead of a breakout that established the stock as a bull market leader.

The uptrend then eased into a rising channel that contained price action into 2016, when the stock broke channel support and spiraled toward a deep low in the upper-40s. Lower highs and lower lows have characterized this complex correction, which is still in control as we head toward the second quarter of 2017.  Even so, the stock has retained the bulk of impressive gains posted in the last eight years, at least so far.

The monthly Stochastics oscillator hit the deepest oversold technical reading since 1997 in December 2016 and flipped into a buy cycle that could last into the second half of 2017. This tailwind should limit short-term technical damage, predicting that dip buyers and value hunters will emerge quickly after post-earnings volatility winds down. It also suggests the 2016 trendline breakout will hold support now centered near $52.50.

NKE Short-Term Chart (2015-2017)

The August 2015 mini flash crash triggered a quick decline into the upper-40s, followed by a vertical recovery wave that set the stage for a final burst to an all-time high at $68.19. The subsequent correction carved a long series of volatile price swings that discouraged buying interest into the fourth quarter of 2016. The technical tone then changed, with the subsequent uptick displaying low volatility while adding to gains at a moderate pace.

On Balance Volume (OBV)  topped out a few weeks before the August 2015 selloff and entered a distribution phase that picked up steam in the start of 2017, at the same time the stock was trading well off the bear market low. Fresh buying interest emerged after the trendline breakout but, so far at least, it’s failed to match price action. This tells us the correction that started in 2015 may not be over yet.  

The Bottom Line

Nike is trading 6% lower after a mixed earnings report that offered no relief from contracting worldwide sales metrics. However, the stock is engaged in a monthly buy cycle that should limit damage and draw in a fresh supply of bottom fishers. 

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>