Lululemon Stock Chart Shows It Isn’t Out of the Woods Yet

NEW YORK (Real Money) -- A few weeks ago, I wrote about three stocks that appeared headed for a fall -- Chipotle Mexican Grill  (CMG), Monster Beverage  (MNST) and Lululemon Athletica  (LULU). Chipotle and Monster have done little since then, and both have continued to slide. Lululemon, on the other hand, reported strong earnings yesterday and shot higher, gaining nearly 11%. The company beat estimates on both earnings and revenue, and raised forecasts for the fiscal year.

I've been fielding a lot of questions about LULU, so I'll answer them here. Yes, I did recommend letting some shares go, but not the entire position, as per the last paragraph of the article linked above. Yes, I'm still holding some shares from my original recommendation at $48, for a gain of 42%.

The most important question is, "What happens next?"

Despite Tuesday's solid move, LULU isn't out of the woods yet. On the positive side, the stock gapped above its 50-day moving average (blue) and is trading above that indicator for the first time in nearly a month. LULU's relative strength index indicator (RSI) is rising (bottom of chart), but hasn't yet reached overbought levels. This tells us the stock still may have some room to run.

Source: TradeStation

However, LULU needs to close above $70 to maneuver past a thicket of resistance. Since that obstacle is only about 2% away from yesterday's closing price, there is no point in opening new positions unless it clears that hurdle first.

Perhaps you're perplexed by the appeal of a company that is known mostly for selling women's yoga pants, because that particular product seems to be easy to replicate. Well, anyone can sell coffee or smartphones, but few companies inspire customer loyalty such as Starbucks  (SBUX) and Apple  (AAPL). Lululemon also inspires customer loyalty, which is why it continues to succeed.

Under Armour  (UA) and Nike  (NKE) are aiming for bigger slices of the women's athletic apparel market. Under Armour hired supermodel Gisele Bundchen for an advertising campaign aimed at lululemon last year, while Nike remains one of the world's most entrenched athletic apparel brands.

In spite of the competition, LULU is in good shape for now. While fending off advances on the ladies front, LULU is gaining traction with males. In the most recent quarter, men's comps were up 19%, on top of prior quarterly gains of 16%, 11%, and 5%.

How will LULU conquer the men's athletic wear segment? If LULU gives us something comfortable, attractive and places it where we can find it, we'll probably wear it.

Editor's Note: This article was originally published at 1 p.m. EDT on Real Money Pro on June 10.

This article is commentary by an independent contributor. At the time of publication, the author was long LULU.

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