Vancouver, B.C. apparel giant Lululemon Athletica Inc (LULU) lost ground on Monday morning after raising the lower end of fourth quarter EPS guidance while agreeing with $775 to $785 million revenue consensus. The company will be speaking at a Jan. 10 conference and made those projections public ahead of the presentation. The decline could test support near $63.50 in coming days.

A large China footprint, with the major manufacturing and retail facilities in that nation, may be insulated from trade disputes between the U.S. and China due to its Canadian domicile, providing an advantage over U.S. competitors if a trade war breaks out. It’s even possible that political stressor finally triggers a breakout above the multi-year range that’s capped the upside for the last five years.

LULU Long-Term Chart (2007–2017)

LULU

The stock came public on U.S. exchanges in July 2007, right at the height of the last bull market. It opened at $12.50 and rallied to $30.35 just three months later, with that level marking the top ahead of a slow motion decline that reached the IPO price in March 2008. That support level held through a bounce that posted a lower May high, followed by a secondary test and breakdown in October, at the same time as the economic collapse.

It bottomed out at an all-time low at $2.16 in March 2009 and rallied within seven points of the 2007 high in 2010, just ahead of the notorious flash crash, which triggered a reversal but no steep decline. Price action then settled into a narrow consolidation pattern that drew a small-scale cup and handle pattern, yielding a December 2010 breakout, while the subsequent rally posted a series of new highs into May 2012 top at $81.09.

A 2013 breakout attempt exceeded that level by less than 1.50 points, giving way to a steep decline that found support in the mid-30s in the second half of 2014. The decline corresponded with the notorious see-through yoga pants scandal, damaging the company brand into a 2015 recovery wave that stalled more than ten points under range resistance. A higher 2015 low set the stage for a 2016 rebound that reversed 66-cents under the 2013 high in August.

The monthly Stochastics oscillator fell to its deepest oversold reading since 2009 in December 2016, at the same time the stock gapped out of a two-month basing pattern. This marks a highly bullish technical event, with price action displaying the strength needed to overcome a major headwind. It bodes well for additional gains in coming months, as well as raising odds for a breakout attempt that finally yields a new uptrend.  

LULU Short-Term Chart (2014-2017)

LULU

The stock has traded within the range of the 2013 into 2014 decline between $82.50 and $36.26 for the last 2-and-a-half years, posting a higher 2015 low and lower 2016 high. A second higher low in the fourth quarter has carved a bullish stairstep recovery, intensified by the December rally gap above the 50- and 200-day EMAs. This buying spike could signal the start of a positive feedback loop that eventually yields a multiyear breakout into triple digits.

On Balance Volume (OBV) hit a new high in August 2016 when the stock tested range resistance, marking a bullish divergence, and settled into a sell swing that ended in December. It’s unlikely to make further progress until price turns higher and trades above the 2016 high at $72.70. That rally will also signal an impending fill of the bearish September breakaway gap between $72 and $75, a major step toward challenging steep resistance above $80.

The Bottom Line

Lululemon may be headed into an assault on multiyear range resistance but first needs to navigate a series of technical hoops. Keep a close watch on accumulation-distribution, through OBV or another indicator, because an uptick is likely to signal the start of the breakout attempt.

<Disclosure: the author held no positions in stocks mentioned above at the time of publication.>

 

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