Athletic clothing manufacturer Lululemon (LULU) disappointed investors Monday with its updated fourth-quarter guidance, sending LULU stock significantly lower. The move caused technical damage to Lululemon’s stock chart in the form of a broken major support trendline.
LULU now forecasts Q4 earnings to come in between 71 and 73 cents per share, vs. its previous guidance of 78 to 80 cents. Lululemon also sees revenue coming in between $513 million to $518 million — well below its previously expected $535 million to $540 million — thanks in part to flat same-store sales.
Lululemon said that while sales went well through the holiday season, January sales have dropped off more than expected.
From my point of view, Monday’s news wasn’t as bad as it was made out to be, but after product recalls and the resignation of its CEO in 2013, LULU stock investors were already on edge, so any marginally negative news was bound to be sold — and it was.
I last discussed the charts of LULU stock on Dec. 13 after the Lululemon earnings report. I rounded up my analysis that day by writing that “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.”
With Monday’s 16.6% drop, LULU stock has now reached my next downside target (and actually surpassed it by a few dollars).
The multiyear view of Lululemon shares looks even worse, as the first major trendline (upper black line) has been broken. LULU did, however, manage to settle the day right at the next supporting trendline, though few investors holding LULU stock are going to take much solace from that right now.
The daily chart of LULU stock now looks exceedingly lousy, and barring any sudden bullish reversal, the trend remains lower. The next support now focuses on the 50% retracement of the entire upswing from the 2009 lows up to the 2013 highs which also would coincide with the December 2011 lows, as well as the downside target of the bear flag pattern I drew on the below chart. All three of those point to a next support area around the $42 mark.
In the immediate term, an oversold bounce is possible; however given the trend, sentiment and downside momentum, Lululemon’s stock looks to have further work to do on the downside.
Last but not least, LULU stock in recent years took a cult status of some sorts, which likely means that plenty of investors are still stuck long. That means any bounces could be used by investors to dump shares.
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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.