Nike Inc. (NYSE: NKE) jumped more than 7 percent last week to close at $56.22, registering a breakout from the short-term flag pattern and giving hope to the investors that the long-term downtrend has been violated and that the stock is about to begin its next leg higher. While there is a good probability that the stock can extend its gains in the coming sessions, there can never be enough precautions in this overly stretched stock market.
In my previous article on Nike titled Nike: This Flag Makes A Decline Almost Inevitable, I had discussed a flag pattern which suggested that the stock could resume its downmove after breaking down from this pattern. I had then concluded,
Nike's current consolidation is representative of a "flag" pattern, which is a continuation pattern meaning that the stock will eventually follow the broader trend. Unfortunately, Nike has been sliding lower since the beginning of the year, which means that the stock may have further to fall. If that happens as expected, the stock will slide to fresh 52-week lows.
I am closely watching the strong support near $48, below which the stock risks attracting significant selling pressure. The Q3 EPS estimates have been drastically lowered by 13 percent in the last one month.
I will be proven wrong if the stock manages to clear the immediate flag resistance of $53.50, beyond which it should rally to $56.
As we know now, the stock has crossed $56 and is above the flag resistance, thanks to the two consecutive sessions of big gains supported by higher volume readings. Take a look at the daily Nike price chart below.
The stock has finally pierced the 200-day simple moving average of $54.25 as the investors/short-term traders create more long positions with the broader market hitting new all-time highs. This is an indication of the demand brewing for the stock as the rest of the market gets heated.
On a weekly price chart, Nike (NYSE: NKE) looks like it has breached the year-long downtrend but another weekly close above the resistance will be closely watched.
If the stock fails to give another positive close in the coming week, it runs the risk of losing momentum. To elaborate on this and to make it easier to understand, I have presented Starbucks' (NASDAQ: SBUX) weekly price chart below. Although the two companies are in very different sectors, it can help to understand how the price action can work.
A simple, side-by-side look at the two charts tells us that they are "very identical." Starbucks was in a year-long downtrend in a fashion similar to that of Nike's. It had also run up furiously after having consolidated in a tight range, registering a bullish breakout. But, SBUX has struggled to acquire more gains since the breakout and that has led to lost momentum.
SBUX example is just to get across the importance of another positive weekly close and the point that investors do not have to necessarily rush to create long positions now. But, investors who are on the opposite side of the trade i.e. the short-sellers must reduce their bearish positions to minimize the risk of huge losses.
Surprisingly, the short-sellers are not backing down. The short interest in Nike is near its 5-year highs at 26.16 million shares shorted. This is 2 percent of the total outstanding float. And given the fact that they are the ones risking more losses, the short-sellers are assumed to be far more researched than the average investor. So, will they continue to circle Nike or will they exit? I clearly do not know and neither does anybody else.
Nike has given a bullish breakout from the flag pattern on significant volumes. The demand is encouraging but the stock needs to register another positive weekly close to maintain the bullish momentum which helped it amass more than 7 percent in gains. SBUX case study presented in the article is a good guide.
The shorts are not backing down but they should since the breakout is on the upside. If the stock continues with the positive momentum, it will bring in huge losses for the bears.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.