Lululemon Misses on Earnings, Weekly Chart Still Overbought

Lululemon Athletica Inc. (LULU) missed earnings per share (EPS) estimates on June 11 as shares stayed below the all-time intraday high of $324.76 on June 10. The stock slipped to as low as $288.61 on June 15, staying above its monthly value level at $281.17.

The athletic apparel and accessories retailer makes those forever popular Yoga pants. Staying in shape has been a theme despite the COVID-19 pandemic. As the economy reopens, so are fitness centers, which should renew demand for both men's and women's active wear.

Lululemon has an elevated P/E ratio of 67.28 and does not offer a dividend, according to Macrotrends. The stock is thus for momentum traders, as its weekly chart is positive but overbought.

The stock closed last week at $297.38, up 28.8% year to date and in bull market territory at 131.9% above its March 18 low of $128.24. The stock is also 8.4% below its all-time intraday high of $324.76 set on June 10.

The daily chart for Lululemon

Lululemon had been above a golden cross since Sept. 1, 2017, when the stock closed at $61.69. A golden cross occurs when the 50-day simple moving average rises above the 200-day simple moving and indicates that higher prices lie ahead.

The stock tracked the 50-day simple moving average higher until Feb. 27, when it gapped below this key moving average. The gap below its 200-day simple moving average occurred on March 9, leading to the March 18 low of $128.24.

The V-shaped recovery from this low was buoyed by the annual value level at $169.35 between March 12 and March 23. The rebound reached its semiannual pivot at $206.89 on April 15. This level provided a buying opportunity when it held on April 20. Its quarterly pivot at $256.73 was penetrated and held on May 20. The monthly pivot for June at $281.17 is now a value level.

The weekly chart for Lululemon

The weekly chart for Lululemon is positive but overbought, with the stock above its five-week modified moving average of $280.08. The stock is well above its 200-week simple moving average of $129.40, which is the reversion to the mean, last tested during the week of Sept. 29, 2017, when the average was $57.43.

The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 86.97 this week, down from 88.94 on June 19. The stock almost reached the 90.00 level, which would have put the stock in an inflating parabolic bubble, which is typically an important technical warning.

Trading strategy: Buy Lululemon stock on weakness to its monthly, quarterly, semiannual, and annual value levels at $281.17, $256.73, $206.89, and $169.35, respectively. Reduce holdings on strength to its weekly risky level at $339.12.  

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for June was established based upon the May 29 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and the lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.