Traders Get a Second Chance at Lululemon

by Serge Berger | January 17, 2013 6:15 am

In early December, I discussed a high-probability trade setting up[1] in athletic apparel stock Lululemon (NASDAQ:LULU[2]). Seven trading sessions later, the stock came within $1 of my $79 price target — close enough to qualify as a great trade in my book!

However, if you missed the trade at the time, LULU is setting up again for a high-probability swing trade to the long side. Let’s take a look.

From a longer-term perspective, the stock remains up big over the past two years, and thus currently is still consolidating some of those gains. Since November 2012, LULU has been trading in a range between $65 and $79, nicely oscillating back and forth. But all ranges eventually come to an end.

The rally from the August lows up to the September highs has now retraced 61.8% for the second time. For those not familiar, 61.8% is an important Fibonacci number that traders watch closely. This retracement level also happens to coincide with a horizontal support line and the low (near $65) of the trading range discussed above.

On Tuesday, Lululemon nearly hit the $65 level in a sharp intraday drop, only to rally in the afternoon, leaving behind a long tail on the daily candle. What we need now is a so-called “follow-through buying day,” where the stock trades higher, thus confirming the bullish candle from Jan. 15.

Given that we have a confluence zone of support near the $65 level — marked by Fibonacci and lateral support, as well as a bullish candle — an aggressive trader could consider taking an initial long position here. The more conservative approach, however, would be to wait for follow-through buying in coming days and set a stop near $65.

Should LULU follow through and continue higher, the stock will then be in a new swing to the upside. An obvious upside target for those long the stock would be near the previous high of $78. Should the stock eventually manage to power through $78, a new trading opportunity might arise — and if so, I plan to analyze that, too.

Serge Berger is the head trader and investment strategist for The Steady Trader[3]. Sign up for his free weekly newsletter here[4].

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