Is Lululemon a Buy-the-Dip Stock After Earnings Slip? The Charts Are a Good Exercise

The report was strong but guidance was a little light. Here's how to invest.
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Lululemon Athletica (LULU) - Get Report shares fell about 5% Thursday after the Vancouver athleisure retailer reported fiscal-third-quarter earnings.

The report was close to stellar, but the guidance was good if a little light. At least a little light for a stock that came into the company's report hitting new all-time highs and had about doubled in the past year.

The strength of the stock and the report have many investors wondering whether this is a buy-the-dip opportunity. It also made Lululemon a solid pick as Real Money’s Stock of the Day.

Let’s take a closer look at the charts.

Trading Lululemon Stock

LULU

When stocks are trending higher, investors often look for an opportunity to go long. For traders, that usually comes on a pullback into support or on a breakout over resistance.

For Lululemon stock it will be a pullback, and it helps that the quarterly report was strong. 

The company beat on earnings and revenue expectations, while surging same-store-sales growth of 16% also topped estimates. Margins expanded year over year and beat expectations, while management raised its full-year guidance.

Apparently, the hangup is related to fourth-quarter guidance. Consensus expectations for both earnings and revenue were at the high end of management’s quarterly guidance.

That’s right. We’re not talking about an enormous miss or a big letdown. We’re talking about guidance that was within range for both sales and profit, with the midpoint coming up just short of consensus expectations.

This "miss" seems more than anything like an excuse for bulls to take profits off the table. 

If Lululemon stock can hold the 20-day moving average it wouldn’t be surprising to see the stock erase its post-earnings losses in the next few trading sessions. That’s one outcome we were looking for in our Lululemon earnings preview.

Below the 20-day moving average and the $220 level will be in focus. If LULU shares fall below this mark and take out Thursday’s low, it could bring up a test of the $209 to $210 area. It helps that the 78.6% retracement sits at $208.79 and that the rising 50-day moving average comes into play at $210.50. 

In short, I would expect this area to support LULU stock on a deeper pullback. 

While I don’t want to be too early on calling Lululemon a buy, this was a pretty good quarter. It’s hard to imagine investors rushing to the exits unless the broader market undergoes notable selling in the next few days or weeks.

Let’s see how it handles the $220 to $223 area. Below could cause additional selling pressure. Above the 20-day moving average and $230+ could be in the discussion soon.