Athletic apparel player Lululemon Athletica Inc. (LULU) - Get Report is set to report earnings Thursday after the market close. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $567.79 million on earnings of 35 cents a share.
Just Wednesday morning, Needham & Company analyst, Rick Patel, reiterated his buy rating on the stock and left his price target unchanged at $67 a share. Patel said, "The factors that held back first-quarter results, including technical eCommerce issues and not enough inventory of compelling product, have mostly been addressed and we expect a return to positive comps."
That positive view from Needham might be misguided, though, when we consider the recent disastrous earnings reports from Finish Line Inc. (FINL) and Foot Locker Inc. (FL) - Get Report . Both of those athletic apparel players gaped-down significantly lower after releasing dismal earnings reports. Let's also not forget the horrible performance in shares of Under Armour Inc. (UA) - Get Report , which are barely trading above their 52-week low of $15.05 as I write.
Of course, LULU operates in a more niche market and has a cult following, but even Baird analyst, Mark Altschwager, said in a note on Monday, "Upside and guidance for continued comp momentum in the second half of 2017 would be needed to drive the stock higher in the near term."
With all of this in mind, let's turn to the chart and see if it's flashing a buy or sell signal ahead of the quarter.
If you take a look at the chart for LULU, something ominous is starting to take shape ahead of earnings. The chart is flashing a mini head-and-shoulders pattern, which is a bearish chart formation that often times leads to lower prices. You can see that LULU hit a high of $60.60 in July (left shoulder) and then attempted to break out in August trading up to $63.86 (head), and then traded down to $57.61 before rallying back to $61.48 (right shoulder).
Since tagging $61.48, this stock has been selling off and is now trading below both its 50-day and 200-day moving averages, as well as its 20-day moving average, which is bearish technical price action. This stock is now at risk of breaking below the neckline of the head-and-shoulders pattern and crashing significantly lower post-earnings.
Traders should now look for short-biased trades either before LULU reports (to anticipate), or after, if this stock manages to break below that neckline around $57 to $56 a share. Look for volume on that move that hits near or above its three-month average action of 2.53 million shares. If that breakdown hits, this stock is most certainly going to trade sharply lower with targets of $50 to $47 in play, or even $44 to $43 a share. Nimble investors who don't like to short could also just simply avoid this stock ahead of the report.
The bottom line, the chart for LULU is flashing some ominous signs ahead of the quarter, and some comparable sector competitors have been getting destroyed following their own weak earnings reports. Traders should look to position short and take advantage of the bearish chart pattern, but also keep a reasonable stop in place in case it's a fake out.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.