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Dow component Nike Inc. (NKE) has been an excellent performer in 2019, posting a 26% year-to-date return during an ascent to an all-time high. However, the stock has made little progress in the first two months of the fourth quarter, testing new support after a breakout above five-month resistance in the mid-$80s. This holding pattern has shifted strong relative strength readings into neutral, raising doubts about the wisdom of buying the stock at these lofty levels.
Price action settled near the midpoint of a three-month trading range in November, giving way to a quiet tape that could dictate Nike’s trend well into 2020. This period has roughly coincided with an announcement that CEO Mark Parker will leave in January 2020, replaced by current ServiceNow Inc. (NOW) CEO and President John Donahoe. It also corresponds with growing odds that no “Phase 1” trade deal will be signed this year, setting the stage for tariffs that could undermine profits and margins.
Nike has taken bold steps to disengage from China through new supplier relationships in an attempt to lower exposure if the trade war escalates into the new decade. However, the company’s actions can’t insulate it from a recession that dampens all sorts of retail sales, especially if President Trump follows through on threats to raise tariffs to 25% or more on household items now sitting on American shelves.
NKE Long-Term Chart (1992 – 2019)
A multi-year uptrend topped out at a split-adjusted $2.82 in 1992, giving way to an intermediate correction that found support at $1.35 in 1994. The subsequent uptick posted a new high in the fourth quarter of 1995 and took off like a rocket, topping out at $9.55 in 1997. That marked the highest high for the next seven years, ahead of a downtrend that relinquished more than 60% of Nike’s value into the first quarter of 2000.
The stock carved a triangular pattern into 2004 and broke out, but momentum failed to develop until 2006, when a healthy advance set into motion. It topped out in the upper teens in 2008 and turned sharply lower during the economic collapse, dropping around 50% into March 2009. The subsequent bounce completed a round trip into the prior high in 2010, setting the stage for a historic breakout and rally that posted impressive gains into the 2015 high in the upper $60s.
It underperformed badly into the fourth quarter of 2017, carving a shallow triangle that generated volatile whipsaws and shakeouts. Bulls resumed control heading into 2018, completing a cup and handle breakout in May. That event set off a buying spree while carving a rising wedge that is still in play as we grind through the last month of 2019. This pattern has a well-earned reputation for trapping bulls in a series of shallow rallies, ahead of a major change in trend.
NKE Short-Term Chart (2017 – 2019)
The stock broke out above the March 2019 high at $88 in September and reversed at wedge resistance for the third time in October after posting an all-time high at $96.87. It filled the breakout gap into November and bounced, stalling at the .786 Fibonacci retracement of the three-week slide. This is a common price zone for reversals in topping patterns, but bulls remain in charge for now due to the breakout.
The on-balance volume (OBV) accumulation-distribution indicator is waving a red flag after breaking out above April 2019 resistance and posting a new high with price in October. The decline into November triggered a failed breakout, while subsequent volume activity has failed to lift the indicator back above the red line. This bearish divergence raises the odds that price will eventually follow suit, breaking down through new support in the upper $80s.
The Bottom Line
Nike bulls are in charge as we head into year end, but growing technical evidence warns sidelined investors to keep their powder dry for now.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.