Lululemon Athletica Inc. (LULU) Stock: It’s Make-or-Break Time

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Lululemon Athletica inc. (NASDAQ:LULU) shares have rallied 15% year-to-date, and from a technical point of view, LULU stock is one of the most constructive-look charts out there right now.

Beat the BellIn fact, Lululemon looks to be one good-news item away from a breakout move. But considering the difficulty of that amid the current bear market … LULU might be best played using options.

Regardless of how you plan to play Lululemon, let’s look at the current setup.

While the broader stock market was ripping higher in 2013 and 2014, LULU stock faceplanted by about 55% from its 2013 highs to its 2014 lows. The cause: fundamental concerns about the company (namely, its top and bottom lines) and competition in the space.

Lululemon shares struggled with the broader market in 2015, too, but instead of building a technical top, LULU stock mostly consolidated its fourth-quarter 2014 and early 2015 rally. Looking at the year-to-date rally in Lululemon, it again is coming in stark contrast to the bear that is firmly holding the broader market.

In many ways, you could say that over the past few years, LULU stock zigged when other stocks zagged. But can Lululemon continue to defy gravity and push higher when we clearly find ourselves in a risk-off environment?

Well, just like it doesn’t pay to fight rallies in bull markets, it’s equally unrewarding to fight gravity in a bear market. Unfortunately, most people’s natural instinct to buy dips doesn’t get cured until the bear market is almost over and most stocks have corrected meaningfully.

That’s one flag of caution I’m raising as it relates to Lululemon shares.

LULU Stock Charts

To put things in perspective, let’s view the multiyear chart of LULU stock.

From 2009 into 2013, Lululemon clearly enjoyed cult-stock status as trend followers and other chart-chasers blindly bought every dip in the stock. Since topping out in 2013 and subsequently correcting in a major way, LULU stock has formed a series of higher lows and lower highs, tightening its bigger-picture trading range.

The stock currently finds itself at the upper end of this narrowing range, and it increasingly looks like it’s coiling up for another move higher. This could lead to a breakout attempt past diagonal resistance.

LULU stock chart weekly
Click to Enlarge

On the daily chart, we see that LULU stock is also finding more comfort above its red 200-day simple moving average and is now consolidating the sharp move since late 2016 right below diagonal resistance from the lower highs in 2015.

The next potential catalyst for Lululemon stock to break higher now looks to be its next earnings release on March 24 (i.e., in about one month from today). While LULU certainly looks to be holding up much better than the broader stock market, traders and active investors must ask themselves: Will Luluemon ultimately will find enough support to push higher even if stocks fall to lower lows again in coming months?

LULU stock chart daily
Click to Enlarge

The Trade on Lululemon

If we give LULU stock the benefit of the doubt, considering the broader market environment, I would suggest selling out-of-the-money put spreads, which defines a trader’s risk but also allows them to participate in any upside surprise/breakout attempt in the stock to a certain extent.

One possible trade would be to sell the April $55/$50 put spread for about $1 credit. Breakeven for the trade is $54, and maximum profit is anywhere above $55 at expiration.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/lululemon-athletica-inc-lulu-stock-time/.

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