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Ulta Beauty Reports Earnings Beat; Here's How to Trade It

Ulta Beauty has been volatile following its quarterly report. Investors should counter-trade the shares. Here's the strategy.

Ulta Beauty ULTA has been extremely volatile following its quarterly reports. 

On Aug. 30 the stock crashed 25% after an earnings miss reported after the close on Aug. 29. This morning the stock gapped 9.3% higher on better-then-expected earnings. 

The only way to manage this type of volatility is to read the daily and weekly charts.

Following the August crash, the stock traded as low as $224.66 on Sept. 16, then rebounded to $267.25 on Oct. 1. 

Going into the earnings report released after the close Nov. 5, the stock traded as low as $222 on Nov. 25 as the low end of the trading range. This morning’s high of $266.44 is challenging the Oct. 1 high establishing a trading range.

The weekly chart shows that the stock gapped below its reversion to the mean -- the 200-week simple moving average -- at $254.32 on the Aug. 30 crash. Today the stock is back above this key moving average now at $258.80. 

This will upgrade the weekly chart to positive, with the stock above its five-week modified moving average at $246.18 with its 12x3x3 weekly slow stochastic reading at 24.18, rising above the oversold threshold of 20.

What caused the stock to pop on earnings? Strong demand for high-margin cosmetics. These are the premium brands backed by celebrities such as Kylie Jenner and Jennifer Lopez. 

The cosmetics retailer beat earnings-per-share estimates as same-store sales met analysts' estimates. Year-over-year income showed a decline, however.

Given this year’s earnings volatility, the stock closed Thursday at $236.02, down 3.6% year to date and in bear-market territory 36% below its July 17, 2019, high of $368.83. 

The stock is clearly in recovery mode, up 6.3% from the Nov. 25 low of $222.

The Daily Chart for Ulta Beauty

Courtesy of Refinitiv XENITH

Courtesy of Refinitiv XENITH

The daily chart for Ulta shows the stock plunging below its annual pivot at $308.40 on Aug. 30. This level began the year as its annual risky level, based on the 2018 close of $244.84, which was a key input to my proprietary analytics. 

This level was first tested on Feb. 15. The level became a pivot that was tested as a value level May 31 on a negative reaction to earnings reported on May 30. 

The close of $346.89 on June 28 was another key input to my analytics and resulted in a second-half semiannual risky level at $371.47. That in turn was nearly tested at the July 17 intraday high of $368.83. 

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The close of $250.65 on Sept. 30 was an input that resulted in the fourth-quarter risky level at $304. The Nov. 29 close of $233.86 was the input that resulted in the December value level at $221.88.

The Weekly Chart for Ulta Beauty

Courtesy of Refinitiv XENITH

Courtesy of Refinitiv XENITH

The weekly chart for Ulta is positive, with the stock above its five-week modified moving average of $246.18. The stock moved above its 200-week simple moving average, or reversion to the mean, at $258.79 after the earnings beat reported after the close Dec. 5. 

The 12x3x3 weekly slow stochastic reading this week is projected to rise to 24.18 from 14.51 on Nov. 29, exceeding the oversold threshold of 20. In mid-April this reading was 91.62, above the 90 threshold putting the stock in an inflating parabolic bubble. It took a while, but this bubble eventually popped with the 25% decline following the Aug. 29 earnings miss.

Trading Strategy: Buy weakness to the monthly value level at $221.88 and reduce holdings on strength to the quarterly risky levels at $304.

Value levels and risky levels are based on the past 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 with readings above 80.00 considered overbought and readings below 20 considered oversold.

Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90. So I call that an inflating parabolic bubble, as a bubble always pops. I also call a reading below 10 as being “too cheap to ignore.”