Despite the Drop, Bullish Tailwinds Continue to Prop Nike Stock

NIKE stockNKE Stock: Reaffirming Support

The new “HyperAdapt” self-lacing sneaker is what originally drew me to Nike Inc (NYSE:NKE). This technological breakthrough is long overdue, and I cannot wait for this technology to finally hit store shelves so I can do away with laces for good. The vision of not tripping over my own laces is what drew me to this name, but it was the NKE stock chart that really piqued my interest.

On March 22, 2017, Nike stock suffered a bit of a setback after it reported a disappointing earnings quarter. This news sent Nike shares tumbling by 7.05%. At first glance, this may seem like an ominous event, but it was where NKE shares found price support that brought me relief. So much relief, that it is my belief that the price level where Nike shares found support was not a coincidence. In fact, it actually served to reinforce my original bullish view. This view was published on February 10, 2017, in a publication titled “Nike Stock is Setting its Sights on New All-time Highs.”

To quickly clarify for anyone who has not had the pleasure of reading any of my publications, I use technical analysis to generate my views on a potential investment. This method of investment analysis is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. All this data can be found on a company’s price chart. As a result, my analysis is heavily dependent on successfully interpreting and deciphering signals that are produced on the price chart.

The following Nike price chart illustrates the technical pattern that was responsible for generating my bullish view on Nike shares.

nike stock chart

Chart courtesy of StockCharts.com

My bullish view on Nike stock was generated in February 2016 after shares closed above a particular level of resistance.

This level of resistance was a trend line that was part of a larger technical pattern known as a bullish falling wedge. A bullish falling wedge contains two converging trend lines, where the upper trend line represents resistance and the lower trend line represents support. Wedge patterns are an area of consolidation where the purpose of this pattern is to alleviate any overbought conditions that were created from the previous advance, and to set up the next move in the share price.

These patterns are particularly powerful indicators because as the pattern develops, the converging trend lines cause a confinement of space. This confinement of space causes momentum to build within the pattern until an eventual breakout releases all this stored momentum. The longer this pattern is in development, the larger the reaction that can be expected to follow when price finally exits the pattern.

Wedges, just like triangle patterns, often have five points of contact before the pattern breaks in either an upward or downward direction. Nike shares completed these five points of contact and exited the pattern in an upward direction. This breakout, highlighted on the chart above, indicates that a new advancing move in Nike stock is now in development.

Consolidation patterns like this wedge pattern are useful on many fronts, and aside from indicating the next direction the share price is going to take, they are also instrumental in producing a potential price objective. The initial objective of a wedge pattern is the highest point from which the price pattern began to develop. This level is the previous all-time high that was set in December 2015, which stands at a price of $67.39. This price objective marks the first level of overhead resistance, and a break above this level would open up the door to much higher prices.

The sell-off that occurred after the earnings report was concerning, but after closer examination, the drop in NKE stock did very little to cloud my bullish view that was generated by the breakout. In fact, Nike shares fell and bounced off a very important level of support.

The sell-off and the area where shares found support is better illustrated on the following Nike price chart.

nke stock chart

Chart courtesy of StockCharts.com

It is not a coincidence that Nike shares found support on the trend line that defined resistance in the development of the bullish falling wedge. When a level of price resistance is broken, it becomes a new level of price support.

Trading back and testing a level of resistance is known as a backtest, and this price action serves to reinforce the notion that a breakout above resistance is legitimate. In some circles, this price action is referred to as “one last kiss goodbye” before the new predominant trend reasserts itself.

This backtest of the trend line also coincides with an important level of support that acted as a temporary level of resistance in 2017. This level of resistance was finally broken on the fourth attempt, and is now level of price support. This level of support has held, and NKE stock has quickly begun to trend higher once again.

Bottom Line on Nike Stock

The sell-off that occurred following the disappointing earnings report has done little to sway my original bullish view on Nike stock. I will remain bullish on NKE stock until there are indications on the Nike price chart that another view is warranted.