Lululemon Was Technically Stretched Pre-Earnings; Here's How to Trade the Drop

Sell Lululemon on strength to its monthly and quarterly risky levels at $224.15 and $227.93, respectively. If the stock on Friday closes below last week’s low of $220.90, that's a weekly key reversal sell signal.
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Lululemon Athletica (LULU) - Get Report reported its 11th consecutive earnings-per-share beat after the closing bell Dec. 11. 

The Vancouver sports and leisure apparel retailer offered a disappointing forecast for holiday sales and the shares lost ground this morning. 

My call is to sell strength to its monthly and quarterly risky levels at $224.15 and $227.93, respectively.

The technicals provided several warnings before the earnings. 

The stock set an all-time intraday high of $235.49 before Wednesday’s close of $233.19. The stock was above all levels from my proprietary analytics, which is a sign that the stock rallied too far too fast. 

The weekly chart showed a 12x3x3 weekly slow stochastic reading of 92.42, well above the 90 threshold on a scale of 0 to 100. That put the stock in an inflating parabolic bubble formation, so the 7.4% decline from high to low was not unjustified.

The stock closed Wednesday at $233.19, up 92% year to date and in a mammoth bull-market run at 111% above its Dec. 24 low of $110.71. 

At Thursday’s low of $218.18, the stock is 7.4% below the all-time intraday high of $235.49 set on Wednesday.

Some say that Lululemon is spending money to expand into lifestyle changing apparel and accessories including the launch into menswear. They say this is contributing to the stock’s selloff.

The stock is not for value investors, as its p/e multiple is elevated at 53.34 and it does not offer a dividend, according to Macrotrends.

The daily chart for Lululemon

Stock could not hold its quarterly and monthly pivots at $227.93 and $224.15

Stock could not hold its quarterly and monthly pivots at $227.93 and $224.15

Courtesy of Refinitiv XENITH

Lululemon has been above a golden cross since Sept. 1, 2017, (not shown on the chart) when the stock closed at $61.69. 

A golden cross occurs when the 50-day simple moving average rises above the 200-day SMA, which indicates that higher prices lie ahead.

The stock traded back and forth around its 200-day simple moving average between Dec. 7 and Jan. 3 as the stock rose from $120.82 and $124.06, and as the stock avoided a death cross as February 2019 began. The 200-day simple moving average was a buy level as 2019 began.

The fourth-quarter pivot at $227.93 has been a magnet since Nov. 27. The December pivot at $224.15 had been a magnet until the negative reaction to earnings this morning. The 200-day SMA is the nearest buy level rising at $184.56.

The weekly chart for Lululemon

Beware of a potential weekly ;key reversal'

Beware of a potential weekly ;key reversal'

Courtesy of Refinitiv XENITH

The weekly chart remains positive but overbought with the stock above its five-week modified moving average at $215.45. 

The stock is well above its 200-week simple moving average, or reversion to the mean, at $215.39. That was 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 89.8 this week from 92.19 on Dec. 6. This reading was above 90 when earnings were released, so the inflating parabolic bubble reading provided a clear warning. 

If the stock closes Friday below last week’s low of $220.90, it would be a weekly key reversal sell signal.

Trading Strategy: Buy weakness to its 200-day simple moving average at $184.56 and reduce holdings on strength to the monthly and quarterly risky levels at $224.15 and $227.93, respectively.

How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.

The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.

The quarterly level changes after the end of each quarter so the close on Sept. 30 established the level for the fourth quarter.

The close on Nov. 29 established the monthly level for December.

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 past 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.”