Lululemon Athletica Inc. (NASDAQ:LULU) shares have been plagued by massive earnings gaps, creating one mess of a chart. But spectators who previously abandoned the queen of stretchy pants in search of cleaner patterns need to return. For the first time in a long time, LULU stock is forming a clean basing formation that is now on the cusp of completion.
That means a profitable breakout trade is in the offing.
Once upon a time, the retail sector was on the brink of a significant breakdown. But not anymore. The latest stage of our epic bull market has breathed new life into the SPDR S&P Retail (ETF) (NYSEARCA:XRT). Since bottoming on Aug. 21, XRT is up just shy of 9%. And while the long-term trend remains iffy, the short-term trend is now pointing higher.
This can only bode well for Lululemon stock.
But it’s not just a sector sympathy play. LULU is making an earnings-driven comeback. The past two quarterly reports delivered notable overnight price jumps helping to propel its newfound uptrend. With the twin boosts, the stock has been able to gain 33% since bottoming on May 31.
Not bad for a little over four months worth of work.
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What qualified LULU stock for today’s selection was Tuesday’s strong rally which carried it to the upper end of its multi-month base. With the climb, Lululemon is now a pebble toss from scoring a major breakout.
The LULU Trade
Implied volatility for Lululemon options is in the tank these days, which makes long premium plays worth a look. Wait for a break above $63.50, then buy the Dec $62.50 calls for around $2.50. This trades sets you up for big gains if the stock sees strong follow through into year-end. The risk is capped at your initial cost, and the reward is unlimited.
For a stop loss to reduce risk, consider exiting if the stock breaches the recent pivot low near $61.50.
As of this writing, Tyler Craig held bullish options positions in LULU. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
