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Nike (NYSE: NKE) appeared on my bullish scan last night and that caught my attention. However, once I looked at the chart I realized that the signal should have come with a warning.
One of my favorite patterns in technical analysis is a trend channel. You have a trendline, upward- or downward-sloped, that connects the lows or highs and then you have a parallel line that connects the opposite. In the case of Nike, they have entered a downward sloped trend channel over the last two and half months.
The high in November connects with the highs through mid-January and the price has hit the upper rail on four separate occasions. The lower rail has been hit three times in the last few months and was hit on Monday to give the stock a boost and create the bullish signal.
The bullish signal looks good based on the past occurrences when the lower rail was hit and also based on the slow stochastic readings making a bullish crossover. However, the upside would appear to be limited by the upper rail of the channel and could cause any rally to stall in the $96 area.
I have never been a fan of playing a short-term bullish trade on a stock in a downward-sloped channel. Nor do I like to make a bearish play on a stock that is in an upward-sloped channel. I prefer to make trades that are in synch with the slope of the trend — bearish plays when the stock hits the upper rail of a downward-sloped channel or bullish plays when a stock hits the lower rail of an upward-sloped channel.
Even without my preferences for how to play a stock that is in a trend channel, I would probably lean toward the bearish side with Nike.That is based on the sentiment toward the stock. The short interest ratio is a paltry 1.6 at present and 20 out of 30 analysts rate the stock as a “buy.” The only indicator reflecting any sort of pessimism is the put/call ratio, which is higher than 84% of readings for the past year.
Nike is one of those rare S&P members that doesn’t report during the earnings season. It reports after what most people consider to be the end of the earnings season. The last earnings report came on Dec. 18 and that helped form the lower rail. The company beat earnings and revenue expectations, but investors were disappointed by the outlook given for future orders.
The next earnings report is due out on March 19. Personally, I would look to make a bearish play on Nike once it rallies back up to the upper rail, but I would be mindful of the earnings date. If it only takes a short time to get back to the upper rail, there should be time for the bearish trade to work out before it could be affected by the earnings announcement.
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