Will Lululemon Make New Highs on Earnings?

Lululemon has rallied 100% over the past 12 months.
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Lululemon Athletica  (LULU) - Get Report has been on fire, rallying 100% over the past 12 months. With the company’s earnings report due up after the close of trading Wednesday, investors are wondering if shares can go on to make new highs before year-end.

When the company last reported earnings in September, we said the stock needed to hold the $190 level should it pull back in the future. Given that the company beat on earnings and revenue, raised guidance and reported strength in its margins, we were prepared for upside follow-through.

Unfortunately, between the two options, the stock pulled back rather than continued higher. Fortunately, we had mapped out support, which more or less held amid that decline. That’s why we look at both upside and downside targets.

Expectations are certainly high for Lululemon shares this quarter. With holiday spending tracking strong, investors are expecting another strong result from one of the retail and apparel companies that has clearly been in the group of “haves” rather than the “have-nots.”

Let’s look at the charts.

Trading Lululemon Stock

Daily chart of Lululemon stock.

Daily chart of Lululemon stock.

The chart above highlights several developments. First, shares have been trading in a relatively well-defined channel for several quarters now (blue lines). It was this channel that we were basing some of our prior levels on when Lululemon last reporting earnings. It’s why I thought shares could move slightly higher, by $5 to $10 apiece.

Instead, we got the “gap and crap” action from Lululemon stock, as shares tumbled from the post-earnings highs. Channel support remained intact though, and more recently, shares have ripped to the upside.

Now just below the channel high, bulls are in a tough spot. 

On the one hand, Lululemon stock has had strong momentum and betting against momentum is tough. On the other hand, up 100% over the past year and up about 90% in 2019, it’s safe to wonder how much gas could be left in the tank, especially given that Lululemon couldn’t hold its gains after its prior better-than-expected quarter.

On a rally, let’s see if LULU can hurdle the prior all-time high at $233.53, as well as channel resistance. Clearing this zone opens up the stock to an even higher run, putting $240+ on the table.

However, if shares can’t hold their gains on a rally or pull back on the numbers, we have to know the downside targets too.

The first is the most obvious, which is the 20-day moving average. If it holds as support Lululemon could be a buy-the-dip candidate going into year-end, particularly if it declines to this zone on a stellar report.

If the 20-day fails, look to the $205 to $210 zone. This area was resistance twice before finally giving way last month as the shares stormed higher. It’s also where the 50-day moving average comes into play. Below that and channel support will need to be the line in the sand for bulls to defend.