Nike approaching a 3-decade strong support level: here's why it will fail this time

Three weeks ago, Nike announced its quarterly earnings report. It was a disappointing earnings report accompanied by the usual optimism from the management, promises of better serving the athletes and ensuring a turnaround is around the corner.

But the company has a lot to do before it can inspire confidence among investors. The upcoming year is dubbed a 'transitional year' by the management. It could either mean the business is at an inflexion point and will be ready to take off by the end of fiscal year 2025. Or it could mean investors should get used to lackluster performance.

What does the chart say?

Let's take a look at the technical chart to see if its worth taking a position in the stock at this point in time.

A poor YTD performance has meant that the stock is closing in on an important support level. A trendline on the logarithmic scale drawn from 1993 to today shows that Nike has touched the support level thrice before, bouncing off to continue its bull run.

It is now approaching that support line for the fourth time.

Does that mean you should start taking a position in the stock? Or wait? There are 3 good reason why waiting is better, as the historic support is unlikely to hold.

Reasons why the support won't hold

Demand is drying

Nike is enjoying better margins on its products, mainly because consumers can now buy shows directly from the company's website with more ease.

However, Q4 direct sales revenue went down while wholesale revenue went up. The downtrend in direct sales is worrisome. And no, the wholesale sales don't make up for that. Retailers are restocking shelves and once they do, Nike won't have the benefits of this revenue.

And that's when things could get really ugly.

All bets on new products

One solution that the management has to counter the downtrend is launching better products. Later in the year, Nike will launch more products and the company is hopeful this is what will drive up the sales.

The question, however, is how confident would an investor be when he bets his money today in the hope that the company will come up with better products down the road?

That's a huge bet to take. And if it doesn't work, the downside could get very ugly.

Battling younger brands

Nike is an old brand and has faced such struggles before as well. The company has always come out strong. But this time, it is battling younger brands that ride fashion trends much better than a big company like Nike, where the pace of change can be slow.

If the trendier brands continue to appeal to athletes, and Nike's brand power keeps declining, then it won't matter how cheap the stock is.

For the above 3 reasons, I believe Nike stock is more riskier than it looks. Investors may want to wait till later in the year to see how the 'transitional' year goes.