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Buying the Dip in Ulta Beauty - Here's Why

Ulta Beauty gapped lower after reporting earnings but now is finding buyers. Here's the key level it's holding after the report.

Bulls may be confused when looking at the action in Ulta Beauty  (ULTA) - Get Ulta Beauty Inc. Report on Friday.

While well off the morning lows, shares were still down more than 7% in the session. That comes after a pretty strong earnings report.

Adjusted earnings of $3.41 a share easily beat expectations of $2.34 per share, while revenue came in ahead of expectations.

However, CEO Mary Dillon announcing her retirement in June threw off the bulls. It’s not unlike when Amazon  (AMZN) - Get Inc. Report reported solid earnings in January, but announced CEO Jeff Bezos would step down later in the year.

Being called a “headline shock” by some analysts, the news has shares reeling lower. Can Ulta Beauty recover its losses?

As it trades down into key support, let’s look at the chart.

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Trading Ulta Beauty

Daily chart of Ulta stock.

Daily chart of Ulta stock.

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Let’s not undervalue Dillon. Losing her as CEO is a blow to Ulta Beauty. It doesn’t mean the company won’t succeed, but losing her a leader is a negative news item.

Obviously, the news helped trigger a gap-down open in Ulta. Broad weakness in the stock market didn’t help matters.

However, the 10-week and 50-day moving averages combined as support, helping to give Ulta stock a bounce after the first hour of trading. For months now, these moving averages have been support.

It helps that Ulta was also trading down into the pre-coronavirus 2020 highs near $304.

With Friday’s solid rally off the lows, it’s got investors focusing on the upside. Specifically, let’s see if shares can push through the 21-day moving average near $330.

If it can do that, perhaps we can see the stock fill the gap, all the way up toward $341.

If shares can’t fill the gap or are rejected by some of the short-term moving averages, let’s see if the stock continues to respect the 10-week and 50-day moving averages.

Below $300 and the bulls will have a problem. That means support will have waned and Ulta will have lost the prior breakout zone.

In that event, look for a test of the 100-day moving average, followed by the $260 area.