Nike, Inc. (NKE) has dropped into the 27th slot in Dow component relative strength, just in time for this week's quarterly earnings confessional. A brutal August decline ended a two-month bounce that had lifted the sports apparel giant to a four-month high, dashing hopes that the correction that started in 2015 was coming to an end. Meanwhile, the reversal has brought deep range support into play for the first time since June, raising the odds for a breakdown that generates a secular downtrend.

Beaten-down shareholders cheered July's mixed earnings report, which beat modest expectations while triggering a double-digit percentage rally that broke an 18-month trendline of lower highs. Bullish momentum dried up quickly, generating six weeks of mixed action, followed by a vertical plunge in reaction to weak quarterly reports from Foot Locker, Inc. (FL) and Dick's Sporting Goods, Inc. (DKS). (See also: Just Don't Do It: Why Nike's Stock Is A Loser.)

Selling pressure has now settled less than two points above a trendline of shallow highs going back to the August 2015 mini flash crash, telling informed market players that a breakdown through $51 will set off long-term sell signals. In turn, that bearish event would complete a multi-year topping pattern, raising the odds for a long-term decline that could reach 2013 support in the upper $20s.

NKE Long-Term Chart (1992 – 2017)

A multi-year uptrend ended at a split-adjusted $2.82 at the end of 1992, yielding a steep decline followed by a secondary rally wave that continued into the 1997 top at $9.55. The stock ground lower into the new millennium, relinquishing two-thirds of its value into the March 2000 low at $3.22. Ironically, that low point coincided with the top tick of the dotcom bull market, giving way to a slow-motion recovery that completed a six-year correction in November 2003. (For more, see: If You Had Invested Right After Nike's IPO.)

The subsequent breakout unfolded in two buying impulses that reached the upper teens in 2008, ahead of a pullback that accelerated during the economic collapse. The stock posted a two-year low at $9.56 in March 2009 and turned sharply higher, breaking out just one year later. This superior performance lifted the stock into a Dow Industrial leadership role that continued into the December 2015 all-time high in the upper $60s.

NKE Short-Term Chart (2015 – 2017)

The 2015 price swing from the August low at $47.25 to the December high at $68.19 carved the boundaries of a trading range that has not been violated in the past 21 months. The shares rolled into a multi-wave decline in 2016, with a long sequence of lower highs and lower lows continuing into the November low at $49.01. The stock bounced back to a trendline generated by those highs in March 2017 and broke out four months later, posting a high-volume gap that many folks thought would end the downtrend. (See also: Nike Declares It Is a Growth Company.)

Mid-summer price action failed to stir strong buying interest, with the rally running out of gas at resistance generated by the August 2016 high near $60. It ticked lower in early August after a third attempt to break that level and gapped down more than 2.5 points on Aug. 18, failing the trendline breakout. In turn, this has set off preliminary sell signals that predict even lower prices in the coming weeks.

On-balance volume (OBV) peaked in August 2015 following years of healthy accumulation and entered a bearish distribution wave that has posted a continuous string of lower highs and lower lows. The indicator has now reached the low from 2013, when the stock was trading in the low $30s, waving a red flag that predicts an eventual breakdown and multi-year downtrend targeting the mid to upper $20s. (For more, see: Nike and Under Armour's Growth Went to Adidas and Puma.)

The Bottom Line

Institutions and the trading public are dumping Nike shares after a summer breakout ended in a bearish island reversal. The failure to hold the mid-year trendline breakout could pound the final nail in the long-term topping pattern that started in August 2015. (For additional reading, check out: Why Nike Finally Turned to Amazon for Growth.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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