Big surprises are in store for investors in 2016. One of them will be a massive selloff in shares of Nike (NKE) - Get Report . Don't get me wrong. I love my Elite socks, Jordan hoop kicks, Roshes for working out and Combat gear for training. I really like the Cortez redux shoes I just saw at Nike Town, which are just like my original Nikes in the 1970s. But, that's all personal, not business, and that is not what stock price behavior is about. Stock prices are determined by the crowd's mood and sentiment, both of which are manically bullish at the moment. This is understandable, as Nike has risen eight times since the 2009 crash low.
This first chart is the monthly bar chart, showing the nearly parabolic rise out of those ashes. Notice that while prices have put in a series of higher highs since early 2014, stochastics have made lower highs, setting up a bearish divergence sell signal. Also, stochastics have just crossed down (red below green), and are about to fall below the upper 90% overbought extreme. When they do, a secondary stochastics sell signal will be given. At the recent highs, around Thanksgiving, price met the upper two-standard-deviation band, which controls 95% of normality. However, at the September and October swing highs, prices met the upper 3 standard deviation band, which contains 99.7% of normality. This recent lessening in buying intensity sets up another kind of bearish divergence sell signal. These indicators suggest that now is not the time to be buying shares of Nike. Buying shares now means you're trying not to miss out on a rally in its late stages and you're trying to gratify your ego, instead of relying upon objective data upon which to base your trading and investment decisions.
The second chart shows daily bars. The yellow box in the first chart is labeled at the zone in the sand for bulls to maintain control. This $120 zone should be seen sooner than later, and is unlikely to hold for more than a few hours to days. Once this zone is broken, the stock likely will follow the path of the blue arrows, which point toward the $103 +/-$5 area. This is the detailed pattern that first down arrow in chart one forecasts for the first part of 2016.
Note the cluster of resistance that can be seen in this second view from the upper two-standard-deviation band (golden/olive line), upper three-standard-deviation band (orange line), upper Bollinger Band (purple dashed line), as well as the completed Elliott Wave patterns within larger patterns (labeled by smaller to larger degrees of numbers). The period around Thanksgiving represents the highest enthusiasm, as manifested by the crowd's all-time high price print, and has been followed by the reversing of the mood pendulum from that manic moment in price/time. Now, the pendulum must swing, as pendulums do, to the opposite pole, where the herd will become very depressed and bearish regarding Nike's future. While we don't know the news that will be linked to this mood change, we expect it to arrive, unless the natural conditions that contribute to pendulum swinging are abruptly suspended.
Let's ask the decision support engine question: "If I had no money in Nike, do objective conditions indicate buying or selling actions here?" The answer is selling actions only!
If you're currently long Nike stock, place sell stops at $126, which is the swing low from Dec. 11. Once the Dec. 13 low at $122 is broken, the bears will grab the baton, and the selling will come swiftly. Don't wait for that. If you're flat, you can establish short exposure anywhere in the $120s, as the next 20 points of movement should be down, and there's even more bearish potential possible. If you're already short shares of Nike, you should hold that exposure or add to it using the parameters above.
Don't wait, pray, hope, or use any other coping mechanism to avoid the clarity of this warning. Nike has weeks to months of declines ahead of it, and you can avoid the slide if you take action that is objectively informed.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.