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

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.