Lululemon to Report Earnings - Here's the Trade

Lululemon Athletica has been a very strong stock, while its recent pullback helped take out some of its overbought condition ahead of earnings.
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Like the rest of the market, Lululemon Athletica  (LULU) - Get Report has been under pressure over the last few days. However, it’s absorbing Tuesday’s selloff pretty well, with shares only down slightly on the day after briefly trading in positive territory.

Still, the multi-day decline has been a nice refresher for Lululemon stock. Last week, the stock was in an overbought state and at one point, was up more than 210% from the March lows.

Lululemon is a great company with plenty of runway. Its acquisition of Mirror has investors thinking about the potential benefits in growth they’re seeing from companies like Peloton  (PTON) - Get Report as well.

Even with its current catalysts though, a rally in excess of 200% in just a few months is a monstrous move. So to see shares back off the highs a bit coming into earnings, scheduled for after the close of trading Tuesday, is a positive development in my view.

Trading Lululemon Stock

Daily chart of Lululemon stock

Daily chart of Lululemon stock

At Tuesday morning’s low, Lululemon stock was almost 13% below last week’s peak. The dip took shares down to the 161.8% extension and uptrend support (blue line).

While it’s positive that this area stepped in as support, it would have been more attractive to longs had shares tested the 50-day moving average and the breakout level from the low-$330s.

When the company reports earnings, I’m looking to see if this area holds by Wednesday’s close (the first post-earnings trading session). A close below $330 puts the $305 level on the table, along with the 20-week moving average near $311.

Below that and the double-bottom low from June near $290 is a possibility.

On the upside, bulls want to see if Lululemon stock can reclaim the 20-day moving average — which acted as resistance on Tuesday — and retest the current highs near $400.

If Lululemon stock can take out the high and clear the two-times range extension at $403.55, then it could put a longer term price target of $488.44 on the table. That is the 261.8% extension from the March low to the pre-coronavirus high in February.

This name has been very strong, so I don’t want to be too quick to become bearish on it. But with that being said, it could still lose some altitude and maintain a healthy look on the charts.

Let’s wait for the earnings reaction and base our trade on how it responds to key levels.