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Athletic footwear and apparel company Nike (NYSE: NKE) looks like your typical consumer discretionary stock -- a sharp rally off the 2009 lows followed by a breather at some time during the past two and a half years that ultimately led to a steep rally in 2013.
For the most part, at least from a price action point of view, the rally in the consumer discretionary sector looks to be able to continue, absent any major bearish reversals in the near term.
For traders whose investment methodology requires them to wait for mean-reversion moves before getting into a stock on the long side, this year has been difficult. The broader indices, and thus most sectors, have simply continued to push higher after only the slightest consolidation phases.
This has resulted in a conundrum for the underinvested at the current juncture as they are asking themselves whether to stick to their trading rules and wait for a pullback in stocks before investing more, or jump in now knowing that the next push higher could just be the last one before a more serious correction takes place. And when it comes to underinvested fund managers, both assets under management and ultimately their jobs are on the line.
This, in my opinion, aside from the marginally improving economic growth picture, is the biggest bull case for stocks. Performance anxiety on the part of investors and fund managers could well lead many more of them to close their eyes and start buying with both hands.
To be sure, for any rational investor, buying into a slope as steep as that of the Consumer Discretionary Select Sector SPDR (NYSE: XLY) is no simple feat.
This brings me to the multi-year chart of NKE looking back to 2009. After a nice, steady uptrend from 2009 into the spring of 2012, the stock corrected 25% over the course of two months. In hindsight, this correction served as a new reference low from which the stock then significantly increased the slope of its ascent, but did so with small consolidation phases along the way.
NKE is a prime example of what investors have grown accustomed to this year, namely a series of rallies followed by consolidations in time (sideways) as opposed to consolidations in price (lower). Strongly bullish tape tends to consolidate sideways rather than lower, thus luring in everyone just in time for a correction.
Since we simply can't know when this latest rally will come to an end, it pays to find stocks trading in tight consolidation patterns that stand a chance of further breakout moves.
On the daily chart of NKE below, I marked a few of the more recent consolidation phases in red. The 10% pullback off the May highs simply retraced back to the November 2012 uptrend line, thus not qualifying as a more meaningful correction.
From there the stock again moved higher, and on Aug. 1, broke out of a bull flag that pushed it back to the May highs, where it has been consolidating for a few days. And today, NKE closed above $66.50, which is precisely what I needed to see before going long.
Recommended Trade Setup:
-- Buy NKE at the market price-- Set stop-loss at $65.40-- Set initial price target at $69.20 for a potential 4% gain in 3-6 weeks
While the sector is hanging on by a thread, shares of this company have already started breaking down.
Wall Street's elite use it to stack the deck in their favor, but there's nothing stopping you from doing it too.
The way I see it, either the fundamental story or the technical breakout should be enough for us to capture a potential 17.6% gain in the next few months.