Nike Stock Could Drop 10% After Kaepernick Gamble

Analysts have come to Nike, Inc.'s (NKE) defense after the company announced a marketing deal with former NFL quarterback Colin Kaepernick, expecting higher sales to overcome boycott threats. But traders took a different view in Tuesday's session, dropping the top-performing Dow component to a four-week low. More importantly, the stock failed the Aug. 20 breakout above the June high, setting off bearish signals that could generate 10% downside in coming weeks. 

President Trump was silent on the issue in the hours following the news, but a Tweet storm attacking Nike is likely in the coming weeks, with football and election seasons amplifying the cultural debate about patriotism and the flag. Shareholders are notoriously skittish animals when it comes to even minor controversies and are unlikely to stick around if political attacks last longer than a few days. (See also: Nike Deal With Colin Kaepernick Sparks Boycott.)  

The stock ended a multi-year uptrend at a split-adjusted $2.82 in November 1992 and sold off to $1.35 just 10 months later. The subsequent upturn topped out at $9.55 in 1997, marking the highest high for the next seven years, ahead of mixed action that found support at $3.22 in the first quarter of 2000. A slow-motion uptick finally reached range resistance in 2004, generating a narrow two-year trading range, following by a 2006 breakout.

The rally stalled in the upper teens in 2008, giving way to a decline that accelerated during the economic collapse. That downdraft found support on top of the 1997 high, marking a historic buying opportunity, ahead of a recovery wave that mounted the prior high in 2010. Buying power increased dramatically following a 2012 pullback, posting impressive gains into October 2015, when the rally ended in the mid-$60s. 

The trading range from that high into the August 2015 low at $47.25 contained price action into January 2018, when a three-month bounce pierced range resistance. It tested that level into May and took off in a trend advance that added nearly 14 points before topping out at $83.68 on Aug. 22. Concurrently, the monthly stochastics oscillator hit the overbought level in January and has ground sideways into late summer. However, it just crossed to the downside and will issue a major sell signal when the blue "fast line" drops toward the panel's midpoint. (For more, see: How Nike Makes Money.)

The rally off the October 2017 low unfolded in two primary waves, bisected by an ascending triangle that carved the handle of a two-year cup and handle pattern. The measured move target for the cup and handle breakout sits around $87, or less than three points above the August high. The second wave gapped up to $81 on July 2, marking resistance ahead of an Aug. 20 breakout that failed in Tuesday's session.

This price action predicts that bears will reload short positions if a bounce reaches $81 to $81.50. The weekly stochastics oscillator supports this view, rolling into a sell cycle that may continue into October or November. Even so, downside appeared limited because bullish technicals in place before the news should ease selling pressure, perhaps generating a successful test on top of the May breakout level near $70.

Bulls need a rally above the Aug. 31 high at $82.25 to overcome this bearish energy and reinstate the short-term breakout. Of course it's possible, but adverse relative strength cycles should be respected because they often signal multi-week declines before key price levels break or a big crowd heads for the sidelines. This is especially true in an election season that will target enemies of the current administration. (See also: Why Nike's Hot Stock May Fall by 10%.)

Nike failed a breakout above the June high after cutting a deal with Colin Kaepernick and could drop 10 points in the coming weeks. (For additional reading, check out: The Top Nike Shareholders.)

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