Friday, September 28, 2012

NKE trips into bearishness

Nike Inc. (NKE) tripped over its 20-day low, triggering a bear signal under the Turtle Trading rules (read them here). It quickly recovered but stayed below its initial stop/loss level, remaining in bear phase with three hours to go before the U.S. markets close.

NKE's opening downside gap, 3%, and the ensuing intra-day rise, 2.6%, came after the company published earnings that hit the analyst consensus precisely, but also reported a 6% decline in China orders.

The present price decline began Sept. 12 at a high of $100.92, a peak that ended an uptrend beginning from a low of $85.10 on June 29. That uptrend began correction of a downtrend that began from $114.81 on May 3.

So, the pattern is a decline from may through June, a 50% upward correction of that decline into September, and then an ambiguous fall that may be 1) a continuation of the decline beginning in May, or 2) a correction of the uptrend from late June.

In case 1, NKE remains in a downtrend, and in case 2, it is continuing an uptrend. A break above $100.92 would suggested case 2, and a decline below $85.10 would nail it for case 1.

The Turtle rules, of course, are never ambiguous. It is a bear position now, and will remain one until there's a clear signal saying to close it.

Nike is the world's leading supplier of athletic shoes and apparel, running the business from its headquarters in Beaverton, Oregon.

Nike has always struck me as being a lot like Apple, a glitzy, innovative company with lots of style. Analysts, however, are fairly underwhelmed, with a negative 13% enthusiasm index.

It's not that Nike is unprofitable. The company shows return on equity of 22% with very low levels of long-term debt, amounting to 2% of equity.

Annual earnings have been on the rise since the 2009 recession low.

The peak quarterly earnings period, it's fiscal 1st quarter, covering the summer, declined this year compared to the year-ago quarter. That, no doubt, contributes much to the analysts' angst.

Institutions, however, are less angsty. They own 83% of shares. The price is above par, although not stunningly so. It takes $1.81 in shares to control a dollar in sales.

Implied volatility stands at 23%, in the lower half of the six-month range, having fallen sharply in one day from Thursday's level of 33%, which was in the upper half of the range..

NKE trades 3.5 million shares a day, on average, and supports a wide range of optoin strike prices, with open interest running to the four- and five-digit levels near the money. The front-month at-the-money bid/ask spread for puts is a fairly low 3%.

Options are pricing in confidence that 68.2% of trades will fall between $89.30 and $101.94 over the next month, for a potential gain or loss of 7%.

Options are trading furiously, at nearly four times the five-day average volume. Calls have a slight edge at 392% of average volume, compared to 367% for puts.

The fair-price zone, with 2-1/2 hours until the markets close, runs from $92.72 to $95.05, encompassing 68.2% of transactions surrounding the most-traded price, $94.39. The current price is above the zone.

Nike next publishes earnings on Dec. 20. The stock goes ex-dividend in November for a quarterly payout yielding 1.51% annualized.

Decision for my account: I opened a bear position in NKE under the Turtle rules, structuring it as long puts expiring in January, with a $100 strike price. The position provides 7x leverage.

I would have also opened a bear position at the open based on traditional analysis. However, the upward retracement that ensued would probably caused me to pass on the trade.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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