Nike, Inc. (NKE) reported better-than-expected earnings on Dec. 19, and the stock keeps moving to new highs, with the latest at $102.74 on Jan. 7. This strength is approaching weekly and quarterly risky levels at $105.75 and $108.49, respectively.

The technicals are positive, with a "golden cross" on its daily chart and a positive weekly chart. However, the weekly chart is showing the technical warning I call an "inflating parabolic bubble" formation. Fundamentally, Nike stock is not cheap, with a P/E ratio of 35.64 and a puny dividend yield of 0.96%, according to Macrotrends.

The stock closed Tuesday, Jan. 7, at $101.78, up 0.5% so far in 2020. The stock set its all-time intraday high of $102.74 on Jan. 7. Nike shares are in bull market territory at 53% above the Dec. 20, 2018, low of $66.53.

The daily chart for Nike

Daily chart showing the share price performance of Nike, Inc. (NKE)
Refinitiv XENITH

The daily chart for Nike shows the formation of a "golden cross" on Feb. 13, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. When this formation is in play, the strategy is to buy weakness to the 200-day simple moving average. This was doable on May 29, when the average was $80.58, and again on Aug. 2, when the average was $81.30. The bullish "golden cross" followed the stock to its all-time intraday high of $102.74 set on Jan. 7.

The horizontal lines are the semiannual value level at $85.94, the monthly value level at $92.44, and the annual pivot at $101.65. Weekly and quarterly risky levels are above the chart at $105.75 and $108.49, respectively.

The weekly chart for Nike  

Weekly chart showing the share price performance of Nike, Inc. (NKE)
Refinitiv XENITH

The weekly chart for Nike is positive but overbought, with the stock above its five-week modified moving average of $98.31. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $68.73. This key moving average was last tested as a buying opportunity during the week of Oct. 20, 2017, when the average was $51.46.

The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 91.99 this week, up from 89.76 on Jan. 3. This reading is not only above the overbought threshold of 80.00 but is now above 90.00, putting the stock in an "inflating parabolic bubble" formation.

Trading strategy: Buy Nike shares on weakness to the monthly and semiannual value levels at $92.44 and $85.94, respectively, and reduce holdings on strength to the weekly and quarterly risky levels at $105.75 and $108.49, respectively. The annual pivot remains a magnet at $101.65. 

How to use my value levels and risky levels: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual, and annual levels. Each uses the last nine closes in these time horizons. New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.