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LULU Stock Is Stretching Lower, But Will It Snap?

LULU Lululemon stock reaches important support after sell-off


Athletic clothing designer/retailer Lululemon (LULU) reported a rise in third-quarter earnings late Thursday, but LULU stock wasn’t getting much of a lift off the news.

beat-the-bell-lulu-stockLululemon earnings came in at $66.1 million, or 45 cents per share, comparing very favorably to the year-ago profit of $57.3 million, or 39 cents per share. Net revenue was higher by 20% to $379.9 million, all of which beat analyst expectations of 41 cents per share on revenue of $374.9 million.

While LULU’s same-store sales increased 5% in the quarter, its outlook was less than flattering. Lululemon now projects flat same-store sales for its fiscal fourth quarter. Furthermore, it sees fourth quarter earnings of 78 to 80 cents per share, well below Street estimates of 84 cents per share. As a result, LULU also was forced to cut its full-year earnings forecast to $1.94 to $1.96 per share on revenue of somewhere between $1.605 billion to $1.61 billion.

Traders and investors found it difficult to be pleased with the rear-view mirror earnings amid the cut forecast, leading them to ditch LULU stock by more than 11%, sending shares below a technically important support level.

LULU stock, once a hot trend-follower equity, has lost nearly 20% during the past 12 months, massively underperforming the S&P 500 (to the extent that’s a fair comparison to make).

More importantly, on the below mutiyear weekly chart, LULU stock, with Thursday’s selloff, has for the first time since 2010 touched its 2009 uptrend line. This support line will hold until it breaks — I don’t say that to be silly, but rather to make the point that it might still be too early to get long-term bearish on the stock, at least judging by the price action.

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I like to focus around the confluence areas on these longer-term charts, and in the case of LULU stock, the area around the $60 mark not only offers the 2009 uptrend, but also a support zone for all of 2013. Simply put, a break below this area might get more real-money investors to jump ship, and thus change the construct of LULU’s big-picture chart in a more meaningful way, because the stock’s sideways trot since early 2012 largely remains one of fairly constructive consolidation.

More near term, and keeping the above chart in mind, Thursday’s selloff has brought LULU stock to immediate-term oversold levels at the June support line around $60, which could lead to a bounce. More concerning, however, is the nature of Thursday’s selling, which came on a big-volume down-gap, and those types of moves often see f0llow-through selling in coming days/weeks.

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So, what’s a trader to do?

For my part, I want to see LULU stock settle into a stabilization range, from which we can play the long side again. If Lululemon shares only give us feeble bounces in the coming days, then a short-side trade would be in the cards, with a first price target in the low $50s.

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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.

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