End Of the Road For Nike?

President Xi Jinping took the stage overnight at the Boao Forum for Asia, an annual summit that’s been dubbed the “Asian Davos,” where he discussed plans to further open up the Chinese economy. He promised to “significantly lower” import tariffs on products including cars, as well as improve the investment environment for foreign companies, in a speech seen as conciliatory amid rising trade tensions between the U.S. and China.

The broad markets were trading up about 1.25% across the board in mid-day trading.  Despite this broader bullish action, Nike, Inc. (NKE) was unchanged to down all morning.  We are one tweet or comment away from all of these gains being swept away and if that were to happen, NKE is most likely going to go down at least as fast if now further given the bearish indicator we see on the VantagePoint platform:

The VantagePoint platform recently indicated a potential downside breakout in NKE could be forming due to a bearish crossover between 4/6/18 and 4/9/18.

Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out four significant things. We have a bearish crossover indicated by the blue predictive indicator line crossing below the black simple moving average between 4/6/18 and 4/9/18. We can combine that with the VantagePoint propriety neural index indicator moving from the GREEN to the RED position one day earlier from 4/5/18 to 4/6/18.  This indicator measures strength and weakness for a 48-hour period, in this case weakness.  The move to the RED position further makes the case for a potential bearish scenario. Additionally, we see that the predicted high and low for today’s range is below the actual high and low from yesterday’s session.  In addition to this bearish crossover, we see that NKE failed to follow through when it made new highs on 4/5/18.  I want to play the VP bearish indication.

Strategy Discussion

If one were a straight stock trader, simply selling NKE in the $67.75 area could prove to be prudent. You are anticipating a move to the downside. It’s also a conservative way to enter NKE without the limitation of time associated with other strategies. In this scenario, it would also be good practice to place a buy-stop order in the $69.00 area to mitigate potential losses.

For more active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit put spread may be one way to approach this situation.  First order of business is to determine your target strike.  This will serve as the short leg of our debit put spread.  We need three pieces of information to perform this calculation:  current price, date of expiration and ATM implied volatility.  In this case, NKE yields a target strike of $64.  You can consider the NKE April 20th 64/66.5 put spread paying $0.30.  The maximum risk of this spread is the amount of premium you paid and the maximum reward is the width of this spread less premium paid.  Max risk = $0.30, max reward = $1.20 which gives us a reward to risk ratio of 4:1.

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.