Athletic clothing manufacturer (and popular momentum stock) Lululemon Athletica (LULU) has gotten my cold shoulder for months given its medium-term toppy pattern and heavy price action. However, on Thursday, Lululemon earnings sparked positive price action, which could soon lead to a nice trade setup in LULU stock with defined risk and a 5% to 10% move higher.
Twelve months ago, Lululemon was forced to recall almost 20% of its yoga pants as customers complained about them being too transparent. However, that didn’t end criticism about Lululemon’s product quality, which ultimately led investors to lose confidence in LULU stock. The trend following crows jumped ship, leaving the stock with but one way to go — lower.
However, on Thursday, investors and traders finally heard something they liked.
Before the start of trading yesterday, Lululemon reported better-than-expected Q4 earnings of 75 cents per share, beating analyst estimates of 72 cents. Revenues were up 7% year-over-year to $521 million, also ahead of expectations of $515 million.
Investors appeared more interested in this than Lululemon’s disappointing Q1 outlook, and pushed LULU stock ahead by 6%.
LULU Stock Charts
Looking at the multiyear chart of LULU stock, note that when Lululemon hit its recent low in February, it had retraced almost 50% of its entire 3,350% rally since early 2009. That’s simply healthy price action for LULU through this long-term lens; this type of price consolidation can have something of a cleansing effect.
With some of the froth now out of LULU stock, longer-term investors can again take a stab at the company. And traders will find higher-probability setups once more, courtesy of more clearly defined risk and reward.
Looking at the daily chart: Since its February lows, LULU stock has quietly begun to build a better bottom, starting with its higher low two weeks ago on March 14 (see the two blue bubbles). Thursday’s rally was nice, but found lateral resistance near the $53 mark from one month ago.
If and when LULU stock can overcome this level, it should be able to move nicely into the down-gap form Jan. 13, which is marked by the blue box on the daily chart.
Simply put, a daily close above $53 will put LULU is great position to move toward $60 in coming weeks.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.