Time to buy this once high-flying apparel stock? Jay Woods looks at the charts ahead of earnings
This week I want to share with you two of the ugliest charts you’ll ever see. It’s the same stock but we use multiple time frames to paint the suboptimal picture. The stock in question was all the rage up to and through Covid but peaked in December 2023. Since that time shares are down more than 75% below its all-time high of $500 and now sit at a critical make-or-break moment from a technical perspective. That stock is none other than Lululemon . Shares have been stretched to the limits and will face a critical test when the company reports earnings next week. Fundamentally, slower sales and rising competition have chipped away at Lululemon’s once dominant position in athleisure. Outside of those concerns, you can add tariff and inflation fears as well as several quarters of lowered guidance to that list. They’ve also been criticized for lack of product innovation and are in the midst of a leadership change. Former Nike executive Heidi O’Neill will officially take over in September and hopes to lead a bounce back. But let’s get back to the charts. The first chart is the stock on a one-year daily basis. Here we see a textbook downtrend. A perfect series of lower highs and lower lows. However, I am forever the optimist and looking for signs of hope and from a risk/reward perspective there may be some brewing. The good Shares have rallied off their recent lows. Momentum indicators in both its relative strength index, or RSI, and moving average convergene/divergence, or MACD, have turned bullish and provided a near-term buying opportunity with more upside potential. The bad That upside potential seems limited to the declining 50-day moving average at $145. However, if we can eclipse that we see a run to $170 and that major trendline. That overall downtrend has been tested and failed to break each time. Let’s not fight the trend. The ugly For that we refer to the 10-year weekly chart below. When we back out the chart to get a better idea of its price history, the picture is even more ominous. Here we see an eight-year rounding top formation that is sitting on major support. What exactly is that support level? For that we go back to its 2007 IPO and use an anchored volume-weighted average price, or VWAP, to demonstrate how severe this level is. This support area around $120 also coincides with a consolidation zone going all the way back to 2018. If there were an area that could hold, this could be it. Any break below this area could spell doom and see shares flush out to the $80 level. The trade As you can tell we are at a major technical inflection point as we come into next week’s earnings. I have been eyeing this stock for quite some time but never pulled the trigger. From a risk/reward perspective, I see three scenarios and two of them favor getting long ahead of earnings. The best case is we hold this level and rally back to the longer-term downtrend at $170. If this rally plays out, it should coincide with the new CEO’s tenure starting in September and the official talk of a turnaround will grow louder. The second scenario is that we continue to consolidate in the support zone and may wait until weeks before the next quarterly report to see any move higher. We will call this a resting pose with potential to pop. Lastly, there is a potential for a major breakdown. If shares break $121, the stock has literally fallen apart at the seams and we need to cut our losses. The downside risk is too extreme and we need to change out of this trade. Trying to nail the exact turnaround of a beaten down stock like LULU is never easy. If you are a believer in the fundamental story and CEO change and trust the technicals to hold these levels, then now may be the a good time to try it on for size. Jay Woods, CMT with Chase Games All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
