If misery loves company, shares of Lululemon (NASDAQ:LULU) were not alone in Friday’s punishing sell-off. But with LULU stock now perceived as less healthy both off and on the price chart, there’s reasons for bulls to sweat and bears to suit up. Let me explain.
There’s nothing fundamentally wrong with LULU stock. In fact it’s fair to say the company looks very fit following its strong Q3 results. The athleisure outfit delivered above-views sales growth of 21% and profits of 75 cents which toppled last year’s results by 34% and ran well-above Street forecasts of 65 to 67 cents.
Nice, right? And it gets better too. LULU provided strong store and digital execution, a fairly upbeat and confident-sounding conference call and gift-wrapped the report with beefed-up, full-year guidance. Nevertheless, Wall Street pulled the yoga mat out from underneath bulls with LULU stock plunging nearly 13.50% on the session.
So, what went wrong? One might point to Lululemon’s upwardly revised guidance owing itself to last quarter’s out-performance, while this quarter’s holiday-related forecast mostly matches consensus views. And unfortunately, thanks to a less-jolly trading environment and “bah humbug” sentiment, LULU stock investors still have reasons to be sweating Friday’s tumble on the price chart.
LULU Stock Price Chart
Even in a healthier market environment, growth stocks like LULU aren’t immune to corrective activity. Generally, a decline in the neighborhood of 30% on a report like Friday’s would be grounds for strongly considering the situation as a reason to buy shares of Lululemon. But that’s not the cycle LULU stock and the broader market are in right now.
Bearing this in mind, shares of Lululemon still up nearly 45% in 2018. That’s a lot in any market. As much, a correction of 31% and failure to hold the 38% retracement level and 200-day simple moving average looks much less interesting as a deep value play than would be the case in a healthy and more optimistic market.
LULU Stock Trade
Until proven otherwise, Lululemon shares are interpreted as a stock to short on rallies. Currently, if LULU stock was to bounce back towards the November lows from roughly $118.50-$122.50, bearish traders would have a decent spot to establish a position into a band of resistance while allowing for a short-term oversold condition to be neutralized.
If this type of price action were to occur, shorting LULU might look like a simple dead-cat bounce over the course of a handful of trading days. Alternatively, if Lululemon continues to come under pressure without catching its breath, I personally wouldn’t chase shares as a short.
At the end of the day, even in a less-sure-footed market, for the right price LULU stock is one to have on the radar for buying. If I were to put a price tag on when to consider a purchase, I’d estimate in-between the 50% to 62% levels from $92.50 to $100 would be a good support zone for that type of proposition. And in today’s volatile and bearish market Christmas for buying Lululemon could arrive early.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. 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. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
