Nike Inc. (NYSE: NKE) was hammered in yesterday’s session following a weaker-than-expected forecast of worldwide future orders. As bears pounced on the opportunity to pressurize the stock, the important support of the 200-day SMA was violated and the stock ended near the day’s lows on strong volume. In this technical analysis article, I will discuss if the stock has re-entered the downtrend breached about a month ago and provide some key technical levels to watch out for.
After the earnings announcement, very few expected the stock to be punished as badly as it did. During the day, the stock tried sustaining above the 200-day SMA at $54.26 but succumbed to the increasing selling pressure.
The daily Nike price chart shows that the stock opened sharply lower than the previous close and maintained its bearish bias. The magnitude of pessimism was so high that the bulls never stood a chance to head above the 30-day and the 50-day SMAs of $56.87 and $55.35 respectively. Closing near the day’s lows, Nike has been pushed back below the downward sloping resistance that had kept the stock from taking off for over a year.
But, is there more pain in store for Nike? Yes, the stock can easily fall another couple percentage points to test the near-term support at $53. As the above chart shows, Nike began its upward journey following this support trendline. Buyers had repeatedly utilized any dips to this technical level to create long positions in Nike. So, it goes without saying that bulls must protect this cushion or risk revisiting $50.
An interesting question that now appears in front of every investor is: Did the market expect Nike to disappoint? The weekly Nike price chart below shows that the stock stalled its upmove and never really took out its previous top even when the momentum was strongly in favor of the buyers. It is telling that the market slipped into a wait-and-watch mode before the earnings which is generally an indication of the underlying nervousness. Having said this, if the stock would have exceeded market expectations, there could have been a huge relief rally as well.
This huge relief rally could have come on account of the short-sellers who have pushed the short positions to a new 5-year high of 32.76 million. This is equivalent to 2.5 percent of the total outstanding float.
If bulls can recoup some of the losses and close the stock above $55 this week, then the stock can be protected from sideways action or from drifting down to $50. The case for $50 will be emboldened if the $53 support is taken out. I am of the opinion that the extreme selling pressure witnessed yesterday was a strong signal of the market’s disappointment with the stock. This is likely to keep the stock suppressed for some time.
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