Ulta Beauty, Inc. (ULTA) is a retailer of prestige cosmetics set to report quarterly earnings after the closing bell on Thursday, May 30. When the stock set its all-time intraday high of $359.69 on April 17, the weekly chart showed a stochastic reading above 90.00 as an "inflating parabolic bubble," which is a warning to reduce holdings, as bubbles always pop.

The stock closed Wednesday, May 29, at $322.07, up 31.5% year to date and in bull market territory at 43.5% above its $224.42 on Dec. 24. Ulta stock is also in correction territory at 10.5% below the April 17 high of $359.69.

Analysts expect Ulta to post earnings per share of $3.06 when the retailer reports results on Thursday afternoon. The stock is not cheap, with a P/E ratio of 30.78 and does not offer a dividend, according to Macrotrends. Ulta offers 25,000 products across 500 brands, so increasing tariffs could be an issue. Ulta is expanding by adding stores and and improving its e-commerce abilities.

The daily chart for Ulta Beauty

Daily technical chart showing the share price performance of Ulta Beauty, Inc. (ULTA)
Refinitiv XENITH

The daily chart for Ulta shows a positive reaction to earnings released on March 14. The stock gapped higher on March 15, setting the stage for the strength to its April 17 high of $359.69. In the process, the stock moved above its semiannual pivot at $332.64, which became a magnet. During May, the stock tested its May risky level as a selling opportunity at $351.19. The stock is back below its semiannual pivot at $332.64, indicating risk to the annual pivot at $308.40.

The weekly chart for Ulta Beauty 

Weekly technical chart showing the share price performance of Ulta Beauty, Inc. (ULTA)
Refinitiv XENITH

The weekly chart for Ulta is negative, with the stock below its five-week modified moving average of $335.97. The stock is above its 200-week simple moving average, or "reversion to the mean," at $243.15. Investors could have bought the stock at this average when it was $224.95 and the stock set its Dec. 24 low of $224.43.

The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week declining to 71.10, down from 78.59 on May 24. At the April 17 high, this reading was 91.62, above the 90.00 threshold putting the stock in an "inflating parabolic bubble," which is popping.

Trading strategy: Buy Ulta shares on weakness to my annual pivot at $308.40 and then to the 200-day simple moving average at $296.22. Reduce holdings on strength to the semiannual and monthly risky levels at $332.64 and $351.19, respectively.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.

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 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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

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