If you plan on running up that hill, a pair of Nikes (NKE) could be the right fit for the task. But now, Nike is tackling a similar scenario, running up a Three Rising Valleys pattern—three consecutive higher lows (more on that later). Does the company have enough momentum to get beyond the current technical hurdle and once again reach its November 2021 peak -- $179.10 per share -- from the prevailing $125 price range? (See chart of NKE below.)
What's the Fundamental Story?
Nike has beaten analyst earnings expectations over the last 12 consecutive quarters. Its last drop, a negative earnings surprise, occurred in its fiscal Q4 2020 quarter—a massive 38% drop (loss of $790 million) during the global Covid-19 lockdown.
It's been recovering since, though sales to its third largest market, China, remain soft. Its last reported earnings report on March 21 was pretty outstanding. Nike did really well in their third fiscal quarter of 2023 compared to what financial experts on Wall Street predicted. Earnings per share and revenue came in higher than analyst estimates.
How's the Road Looking Ahead?
The road to recovery in China still has a few hurdles, but Nike CEO John Donahoe expects things to improve. As for global sales, Nike saw double-digit growth in the US, Latin America, Europe, Africa, Asia-Pacific, and the Middle East.
Also, Nike has really been putting a lot of work into growing their direct-to-consumer sales. They've been pouring money into cool experiential stores, working on their loyalty program, and increasing their e-commerce sales. It's been costly, but sales have accelerated as a result.
Running With the Bulls
On the technical side, Nike formed a Three Rising Valleys formation.
Popularized by technical analyst Thomas Bulkowski, Three Rising Valleys is a bullish chart pattern that signals a potential upward trend in the market. The pattern consists of three consecutive valleys (or troughs) that form within an existing uptrend. Each valley is slightly higher than the previous one, suggesting that buying interest is increasing, and the price is likely to continue rising.
CHART 1: NIKE STOCK'S THREE RISING VALLEYS PATTERN. The stock could move as high as the 100% measured move target, which is around $136 (red dashed line).Chart source: StockChartsACP. For educational purposes only.
How Do You Trade NKE Stock?
With this pattern, you'd take an altered measured approach (according to the description in Bulkowski's book Encyclopedia of Chart Patterns).
Entry point
- You would enter a long position at [A], a breakout above the top of the formation.
- For early entries, a breakout above the green line at [B] would also work.
Price targets
As far as price targets are concerned, here's how you'd calculate it. Start by subtracting the top of the formation (126.06) from the bottom (115.79), then add the difference (10.27) to the top. The targets will thus vary based on the 100% measure of 136.33 (or just 136 to round off). You can see where that level is on the chart (see red dashed line). Stop losses are usually placed at the bottom of the formation.
Note: Traders' target price preferences will vary anywhere from 60% to 100% of the target.
Looking at other technical indicators to contextualize this formation, the 50-day simple moving average (SMA) crossed the 200-day SMA a few months back, forming a Golden Cross. We also see the Moving Average Convergence/Divergence (MACD) looking favorable, with the MACD line having crossed above the signal line, and both crossing above the zero line.
But there's also a drop in volume. Price has pulled back, but volume has also dwindled. If price breaks above the formation, look at volume to assess Nike's momentum.
This pattern generally has a low failure rate (instances where it doesn't yield a rally of a specific magnitude, such as five or 10 percent). However, there are occasions when the pattern doesn't generate the anticipated rally. So it may be worth incorporating other indicators to confirm the upward move before entering the trade.
The Bottom Line
So overall, Nike's stock is showing some favorable prospects, beating earnings expectations as it continues to focus on growing its direct-to-consumer sales. While there are challenges in China, Nike's global sales look promising. The Three Rising Valleys pattern suggests a potential upward trend, but keep an eye on volume and other indicators to confirm it. If it runs bullish, monitor its progress and momentum. Remember, trading is about engaging risk; so stay alert and manage your trade as needed.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
Happy charting!
