Trendy sports apparel manufacturer Lululemon Athletica Inc. (LULU) rallied more 8% in the first hour of Friday's session after beating second quarter profit and revenue estimates while raising fiscal year 2018 guidance. Healthy sales acceleration underpinned those bullish results, lifting the stock above the 200-day exponential moving average (EMA) and into a key test at the mid-summer high just below $64.

The stock has struggled since topping out in the low $80s in 2012, drifting sideways in a broad-based correction that could eventually complete an inverse head and shoulders breakout pattern. For now, the stock needs to trade above the summer high to improve the bearish technical tone in place since the third quarter of 2016 and end a volatile sequence of double-digit percentage gaps that have tested the will of long-term shareholders. (See also: Understanding Lululemon's Business Model.)

LULU Long-Term Chart (2007 – 2017)


The stock came public at $12.50 just three months before the 2007 bull market top and topped out at $30.35 at that time, rolling over in a downtrend that accelerated during the 2008 economic collapse. It posted an all-time low at $2.16 in March 2009 and turned higher, gaining ground at the same trajectory as the prior decline, completing a 100% retracement​ into the 2007 high in 2011. It then broke out, lifting in multiple waves into the May 2012 high at $81.09, which marks major resistance more than five years later. (For more, see: What's Behind Lululemon's 450% Rise Since Its IPO?)

The stock built a sideways pattern into January 2014 and broke down, finding support at a three-year low at $36.36 in June. A bounce into April 2015 carved a lower high in the long-term sideways pattern, while a decline into November posted a higher low. Price action unfolded on a positive note in 2016, with the stock surging higher in a healthy uptick that stalled in August just 79 cents above the 2012 high.

A two-legged decline into May 2017 posted a second higher low off the deep 2014 low, while a three-month recovery wave is picking up steam after this week's positive news. The stock has lifted above $62 in the first hour of Friday's session and appears headed into a test of the August high at $63.86. That marks a key price level that, if mounted, will fill the March gap and generate a tailwind that supports even stronger gains into the fourth quarter. (See also: Lululemon Sinks on 'Slow Start' to 2017.)

The stock has failed two attempts to break out above the 2012 high, establishing strong resistance in the lower $80s. The multi-year correction has taken the shape of a possible inverse head and shoulders pattern, with an August 2012 left shoulder, a June 2014 head and a potential June 2017 right shoulder. It will now take a buying impulse into horizontal resistance to complete the pattern and set the stage for a major breakout into the triple digits.

LULU Short-Term Chart (2016 – 2017)


A Fibonacci grid stretched across the 2016 into 2017 decline organizes volatile price action, with the bounce into August stalling at the 50% retracement level.  The December 2016 swing high stretches up to the .786 retracement, with a rally above that level needed to end the string of lower highs and lower lows since August 2016. That uptick would also establish strong support at the 200-day EMA, generating a platform for a final trip back to 2012 resistance. (For more, see: Buy Lululemon on Under Armour, Nike Weakness: BofA.)

On-balance volume (OBV) highlights the volatile two-sided tape in place throughout this decade, topping out in 2011 and entering a long-term distribution wave that continued into the middle of 2014. Committed buyers took exposure during the next two years but were denied a breakout in 2016, generating a renewed downturn that has held well above the prior low. Thus, the outlook is modestly bullish, telling us that the stock has sufficient sponsorship to support another trip into the low $80s.

The Bottom Line

Lululemon stock is trading at a three-week high after a strong quarterly report and could add to gains in the coming weeks. This positive price action could also mark the initial phase of a third attempt to break multi-year resistance in the low $80s. (For additional reading, check out: Lululemon Is Growing Its Mens Business.)

<Disclosure: The author held no positions in the aforementioned securities at the time publication.>

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