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Nike Becomes Overbought

11/28/05 08:37:21 AM
by Arthur Hill

Nike became overbought in early November and is showing signs of fatigue as it tests its early November high.

Security:   NKE
Position:   Hold

Figure 1 is a daily close-only chart of Nike (black line) with Bollinger Bands overlaid (magenta line). The middle band is the 20-day exponential moving average (EMA). In addition, I am using a 15-day relative strength index (RSI) as a momentum indicator to identify overbought and oversold readings. The idea is to catch a Bollinger Band signal after an overbought or oversold reading. This can increase the odds of success.

FIGURE 1: NIKE, DAILY. This is a daily close-only chart of Nike (black line) with Bollinger Bands overlaid (magenta).
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
The stock become oversold and produced a Bollinger Band buy signal in September (green circle). First, the stock moved below the lower Bollinger Band in August. Second, RSI moved below 30 in early September and this signaled an oversold condition. Third, the stock moved below its August low in early September and failed to exceed the lower Bollinger Band. The combination of a lower low and no Bollinger Band touch produced a bullish setup that was confirmed with a surge above the middle Bollinger Band (20-day EMA).

After a two- to three-month run higher, the stock has a potentially bearish setup in the works. First, the stock moved above the upper Bollinger Band in early November. Second, RSI moved above 70 and this created an overbought condition. Third, the stock moved above its early November high last week and failed to exceed the upper Bollinger Band. Even though this failure has created a bearish signal, it is still only a potential signal that requires confirmation. A move below the middle band and mid-November low would complete the signal and reverse the two- to three-month uptrend (red circle).

Arthur Hill

Arthur Hill is currently editor of, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for and the main contributor to the ChartSchool.

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