Has Nike Lost Its Footing?

Based on my experience with gap downs following earnings misses similar to Nike, investors will see short-term lows Friday or Monday. Friday's low testing $85 with a strong bounce higher suggests it won't take much time for the market to figure out the first knee-jerk reaction may be overdone.

Bargain hunters and short sellers covering positions could push the price up quickly in relation to the gap-down price this week. Looking at the chart, I expect short-term resistance near $92 and again at $96. Round numbers often attract like a price magnet, and repel, causing a bounce. Expect a lot of volume to trade near $90 a share, but also be prepared for bargain hunters to start positions under $65 as an entry. Nike doesn't have debt (relative to the cash on hand) and the price-to-earnings multiple is not out of line for the growth rate and under 20.

If you are looking for today's drop to signal a buying opportunity, you may find early next week to offer the best opportunity. There is no hurry jumping on board with Nike. Stocks dumping as a result of misses like this one take time for sellers to rotate out of and buyers to find value. Watch for the second break above $92 as the one that "sticks."

Operating margins, while already low compared to the industry, appear to have room to grow if revenue is climbing at such a fast rate.

What's the best play with Nike? There should be a very attractive trade coming up Monday and or Tuesday. Near the end of the day, if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom.

It's not one to get greedy with, hold on for a few days and as the implied volatility falls (hopefully with a nice dead-cat bounce) exit out with a quick hit and run for profits. Otherwise, for longer term investors, the best play is to wait until we are closer to the next earnings release for an entry.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.