Lululemon Ready for Follow-Through Buying

by Serge Berger | December 7, 2012 9:28 am

Yogawear and athletic apparel purveyor Lululemon (NASDAQ:LULU[1]) has been quite the growth story in recent years, and it’s a stock that’s volatile enough to satisfy every trader’s cravings.

LULU has well more than doubled since 2011, and in 2012 alone it is higher by roughly 50%, outperforming most in its industry.

On Thursday, Lululemon announced third-quarter earnings that beat expectations, and it also raised guidance for the full year. At one point after the news broke, LULU traded as low as $63.60, down 7.3%, but that quickly changed as the official trading session began.

What at first looked like a day that could break the stock ended up in a big intraday turnaround, leaving LULU higher by some 7.25% on the day.

The daily candle that formed as a result of the intraday turnaround is a classic hammer formation, whereby prices at the lows of the day were rejected so strongly that the stock not only left a long tail behind, but also closed right at its highs for the day.

Yesterday’s price rejection also came near the bottom of a trading range (oval shaded area) that has been in place since the end of August. Volume too was extraordinarily heavy, at more than 10 million shares traded Thursday.

On the chart below, note how the stock’s sharp intraday turnaround managed to push it back above its 50-, 100- and 200-day moving averages and right back to its November highs, which have held as resistance since mid-October.

Lastly and equally importantly, on Nov. 15, LULU found support at the 50% Fibonacci retracement level of the August-to-September rally … yesterday’s early-morning selloff again held that support level. The aforementioned resistance line (red) in the stock also can be seen in some of the broader indices.

Yesterday’s massive upside turnaround should have given LULU enough boost for follow-through buying in coming days. Participation by the broader market could further boost the stock’s performance into year-end as momentum funds and performance-chasers jump on the bandwagon.

Lululemon could target the September highs near $79.

Serge Berger is the head trader and investment strategist for The Steady Trader[2]. Sign up for his free weekly newsletter here[3].

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