Following Lululemon’s (LULU) recent earnings report and bearish investor reaction, it’s not a “stretch” to see lower prices ahead for LULU stock.
For traders, a bearish put vertical looks well-priced to take advantage of that “downward dog” technical action.
Let me explain.
Two weeks ago, the yoga-centric fitness apparel shop Lululemon announced what appeared to be, good results. The outfit topped profit and sales forecasts for its second quarter and raised the bar on guidance for its third quarter. However, investors saw things a bit differently.
Beneath the surface, Lululemon’s earnings report showed inventory levels stretched to “sky-high” levels. Further, the company’s raised guidance was still problematic in that it fell short of Street expectations. Combined, many analysts fear LULU will be in need of a strong holiday season in order to fulfill its full-year guidance
The net effect of the earnings announcement imbued bears in Lululemon. And in a game where price action is the final arbiter, investors long LULU stock bent over backward to sell shares as LULU tumbled by a sweaty 16% to pierce January’s prior year-to-date low.
LULU Stock Charts
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LULU stock’s flag pattern is a first level consolidation and comes on the heels of decisive, massive volume breakdown from a bearish head and shoulders topping pattern following Lululemon’s earnings report.
The combined pattern in LULU stock, heavy volume and the fact the flag has developed below neckline resistance gives bears a strong directional edge over bulls attempting to hold onto a 50% Fibonacci retracement level that essentially stands alone as a technical support.
Based on head and shoulders pattern, an estimated price projection for LULU stock is conservatively pegged at $45 based on the approximate $10 vertical distance from the head to LULU’s neckline and projected from the actual breaking point in early September.
LULU Stock Long Bear Put Strategy
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One option contract in LULU stock which looks reasonably priced and fits in well with our view is the Nov $50 put for $2.10 or less.
The 30 delta put is about 5% out of the money. This pricing assists traders that might want to implement money management and a stop-loss to 50% of the put premium while giving LULU stock enough wiggle room to tumble further.
Additionally, given our volatility assessment of reasonable pricing for Lululemon options, time decay still not a threat for the November contract and $5 of intrinsic value should our $45 price target play out during the next several weeks — it’s not a stretch to see this particular put fit for profiting from a bearish “downward dog” in LULU stock.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Mr. Tyler currently holds no positions in any of the securities discussed in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
