Shares of athletic clothing company Lululemon Athletica inc. (NASDAQ:LULU) have been a good outperformer not only versus the broader stock market, but also compared to the consumer discretionary sector to which it belongs.
LULU stock gapped higher after its most recent earnings report in early June, and it still looks solid on all time-frames in both relative and absolute terms.
Let’s look at how active investors and traders can continue to play Lululemon shares from the long side.
When Lululemon reported its latest batch of earnings on June 9, the company slightly missed analyst estimates for both the top and bottom lines. But it did raise its full-year guidance, catching bears by surprise and sparking a rally in LULU stock, which quickly shifted shares into a bullish posture.
Bears have been arguing for some time that increased competition will hurt Lululemon, and that LULU’s products are priced too steeply. What bears seem to have gotten wrong however — as was proved in the latest quarter with improvements in various sales metrics — is the brand loyalty that Lululemon seems to enjoy. While concerns about the potential for future stake sales by founder Chip Wilson still exist, for the time being it looks like investors are focused on sales growth.
LULU Stock Charts
Below I created three charts, all of which show further bullish metrics from a technical perspective.
Starting off with a relative chart (ratio chart) where I divided LULU stock by its sector, represented by the Consumer Discretionary SPDR (ETF) (NYSEARCA:XLY), we see that relative strength of LULU stock was strong right out of the gate early this year, but then began to consolidate in what we can look at as a bullish flag pattern. Typically this type of pattern resolves to the upside, which is to say that LULU stock stands a good chance of further outperforming its sector on a relative basis.
Moving over to LULU stock itself, on the multiyear weekly chart, we see that the January rally managed to push Lululemon past the red, dotted diagonal line of resistance as drawn from the 2013 highs. LULU then also began to consolidate constructively in absolute terms, but has held above this diagonal line as support ever since.
Finally, on the daily chart, LULU stock has mostly traded in a range between $60 on the low end and $70 on the high end. On June 9 after the latest earnings report, Lululemon rallied about 10% on the day, bringing the stock back to the upper end of the multimonth range. However, LULU so far has not managed to break above the $70 area, as it has consolidated below this level for the past couple of weeks.
Active investors and traders could look to buy LULU stock on the next bullish candle or break above $69 on a daily closing basis, for a move into the mid-$70s as a first price target. The major factor keeping this stock from moving solidly higher for the time being would be broader-market choppiness.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
