Stretch for Lululemon's Downward Slog

NEW YORK (TheStreet) -- Vancouver-based fashion designer and retailer Lululemon Athletica (LULU) ripped a few investor portfolios to pieces in the last week. Lulus's stock is trading at $57.61 a share as of this writing, losing more than $12 from a week ago.

I admit I'm not the biggest fan of fashion stock plays. They're fantastic if you get in early, but by definition, that means most investors don't and, subsequently, most don't make oversized profits. That said, it doesn't mean now is the time to sell your shares. In fact, based on a technical analysis reading of the recent sell-off, I think now is the time to get long.

Catching falling knives isn't for the faint of heart, and here's the type of trade I'm most cautious approaching. Once a stock begins to trend lower, they tend to overshoot and fall much further than the situation warrants. Falling prices almost always overshoot because the selling leads to even more selling from panic rather than a logical assessment of new information. In the end, logic rules the day and the market fairly values any given security. In the short-run, emotion is the master.

Understanding just how long "the short-run" can last is the real trick and what I spend my days examining. Despite being an active trader, I don't spend my days buying and selling shares from open to close. Most of my time is dedicated to researching potential opportunities based on historical results with similar criteria.

On Monday, I wrote a Real Money Pro trade idea for Lululemon based on an actual setup I use. Take a look and see if you agree.

(If you don't have a membership, get a free one to see if you can profit. Education is a lot cheaper than losses and missed opportunities. Anyway, if you're interested in buying the current dip, or want another reason not to sell, it's worth your time.)

Usually, after a stock gaps lower, you can anticipate one to three days of follow-through. In other words, you should almost never buy the first day of a "crash." In the case of Lululemon, a relatively lower risk point to buy this type of dead-cat bounce is during the third day. Because LULU is also experiencing weakness on comments by management, Monday during the close could make sense as well.

For long-term investors, the story isn't quite as rosy. The best medicine for poor guidance is better guidance. (Big surprise, I know, but how long you can expect for a recovery?) Usually, it takes at least a quarter or two of favorable results before a company's prospects improve enough to propel shares above the original gap lower. Otherwise, in about a week, history demonstrates you should expect weakness moving forward.

With option premium elevated from panicking investors, selling covered calls against your shares is one strategy to lower your holding risk. Look to sell calls late on Wednesday or into Thursday if shares are recovering above $60 per share.

At the time of publication, Weinstein had no positions in securities mentioned, but has live bids to buy LULU.

Follow @RobertWeinstein

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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