Nike Stock May Rebound After Earnings

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The Dow component Nike, Inc. (NKE) reports results after Tuesday’s closing bell, with Wall Street analysts expecting earnings per share (EPS) of $0.56 on 9 $.5 billion in the third quarter of 2020. The sportswear and apparel giant saw its shares tumble more than 2% after beating estimates on both metrics in the December release as investors jumped ship due to lower than expected gross margins. The stock rallied quickly, hitting a record high in January.

A sell-off in mid-February accelerated in March, gutting this household icon and former market leader by more than 30% before it rebounded strongly on Friday. Nike stock is trading flat so far on Monday morning, buoyed by a lower earnings revision from Pivotal Research Group. The boutique company cited disruptions in China due to the COVID-19 pandemic as well as the expected impact in North America and Europe.

Despite high volatility, price action held near long-term support in the lower $70s, prompting speculation about the reaction to Tuesday’s report. With the US government spending trillions to support the economy, the bears cannot rule out a strong positive reaction that targets the March 12 unfilled gap between $78 and $84. Progress above that level could be difficult, at least until the pandemic has run its course.

NKE Long Term Chart (1992 – 2020)

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A multi-year uptrend peaked at a breakdown-adjusted $2.82 in 1992, giving way to a steady decline that eventually bottomed out in the first quarter of 1994. The subsequent rise posted a new one-year high. later, resulting in an immediate and final break. rally wave into the 1997 high at $9.55. This marked the next seven-year high, ahead of a shallow trading range with support just below $4.00.

A 2005 rally made steady progress towards the March 2008 high of $17.65, before an orderly correction that bottomed in March 2009 after shedding nearly half the stock’s value. The wave of recovery that followed made a round trip to the previous high of 2010, producing a breakout that propelled Nike to market leadership in the first half of the decade. The upward trend ended in the fourth quarter of 2015, turning into a symmetrical triangle that continued through 2017.

A breakout in 2018 restored the leadership of Nike stock, creating a series of higher highs and lows that ended with the all-time high of January 2020. Price action between 2017 and 2020 dug a ascending channel that broke lower in March, signaling major technical damage that could take months or years to overcome. Channel resistance closely aligned with the broken 200-day exponential moving average (EMA), limiting the upside to around $90.

The monthly stochastic oscillator entered a sell cycle from the overbought zone in January 2020, predicting at least six to nine months of relative weakness. The indicator now extends across the midpoint of the panel, indicating that engaged bears are controlling the band while further limiting rally potential. Additionally, the stock is now trading below the 50-month exponential moving average (EMA) for the first time since April 2009, increasing the odds that the decade-long uptrend is over.

NKE Short Term Chart (2016 – 2020)

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A Fibonacci grid spanning the 2016-2020 uptrend places last week’s low at the 0.786 rally retracement level, which marks a high odds reversal zone. Meanwhile, the on-balance-sheet volume (OBV) accumulation-distribution indicator hit a new high in the fourth quarter of 2019 before peaking with price in January. The distribution phase in March reached horizontal support dating back to April 2019, with both elements increasing the odds of a news buying reaction following this week’s earnings report.

The essential

Nike stock may bounce back from this week’s earnings report, but short-term upside potential remains limited, with strong resistance between $80 and $90.

Disclosure: The author held no position in the aforementioned titles at the time of publication.

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