Lululemon Athletica (LULU) - Get Report opened Monday, June 10, with a test of its quarterly pivot at $176.20. This level has been a magnet since April 23 with its all-time intraday high of $179.49 on April 24. If the stock is below the $176.20 when the company reports earnings after the close on June 12, reduce holdings.
Lululemon is a play on technical momentum as its P/E is elevated at 44.69 and it does not offer a dividend, according to Macrotrends.
The stock has had a strong momentum up 41.8% year to date with a total bull market rise of 55.8% since trading as low as $110.71 set on Dec. 24. A close this week below its five-week modified moving average at $170.41 will downgrade the weekly chart to negative. Given this risk, momentum investors long this stock should reduce holdings, just in case.
Analysts expect Lululemon to earn between 71 cents and 79 cents per share when it reports after the closing bell on Wednesday. The company has an eight-quarter winning streak in terms of beating earnings-per-share estimates. The company is becoming more of an athletic brand going beyond the iconic yoga pants line. Expansion is expected to include shoes, personal care products and menswear.
Daily chart for Lululemon
Courtesy of Refinitiv XENITH
Lululemon has been above a "golden cross" since Sept. 1, 2017, when the stock closed at $61.69. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving and indicates that higher prices lie ahead, and this was a solid momentum buy signal for the stock. Notice the price gaps higher following positive earnings.
An earnings beat on Aug. 30 resulted in a price gap higher on Aug. 31. This strength was lost during its fourth-quarter decline. The stock experienced a bear market decline of 32.8% from $164.79 on Oct. 1 to its 52-week low of $110.71 set on Dec. 24. A negative reaction to earnings on Dec. 7 pushed the stock to this low. Note that between Dec. 7 and Jan. 3, the stock traded back and forth around its 200-day simple moving average, which continued to rise from $120.82 and $124.06 as the stock avoided a "death cross" as February began.
On March 27, the company reported solid earnings, which resulted in the huge price gap higher on March 28. The close of $121.61 on Dec. 31 was an important input to my proprietary analytics and its annual and semiannual value levels lag at $116.23 and $113.73, respectively. The close of $163.87 on March 29 was an input to my analytics and its second-quarter pivot remains the key magnet at $176.20. The close of $165.59 on May 31 was also an input and its value level for June is $140.74.
Weekly chart for Lululemon
Courtesy of Refinitiv XENITH
The weekly chart for Lululemon ended last week positive but overbought, but a downgrade to negative is possible this week, if the stock ends the week below its five-week modified moving average at $170.24. The stock is well above its 200-week simple moving average or "reversion to the mean" at $86.97, last tested during the week of Sept. 29, 2017, when the average was $57.43.
The 12x3x3 weekly slow stochastic reading is projected to slip to 79.83 this week down from 81.34 on June 7. This is a warning for the downgrade to negative. During the week of May 10, this reading was 90.50 above the 90.00 threshold as an "inflating parabolic bubble."
Trading Strategy: Buy weakness to its monthly value level at $140.74 and reduce holdings if the stock is below its quarterly pivot at $176.20 at the close on Wed., June 12.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level changed at the end of January, February, March, April and May. The quarterly level was changed at the end of March. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to Use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.