Lululemon Stock at a Technical Crossroads: Buy the Dip Before Earnings?

By Jay Woods, CMT

This week, we're diving deep into two of the most challenging charts you'll encounter, focusing on a single stock across multiple timeframes to reveal a concerning picture. The company in question was a darling of the market, soaring through the pandemic, but it hit its peak in December 2023. Since then, shares have plummeted by over 75% from their all-time high of $500, now resting at a critical technical juncture that could determine its future direction. That stock is none other than Lululemon.

Shares have been stretched to their limits and are poised for a crucial test as the company prepares to announce its earnings next week. Fundamentally, Lululemon faces headwinds from decelerating sales and intensifying competition, eroding its once-dominant position in the athleisure market. Adding to these concerns are fears surrounding tariffs and inflation, compounded by several quarters of lowered financial guidance. The company has also faced criticism for a perceived lack of product innovation and is currently navigating a leadership transition. Former Nike executive Heidi O'Neill is set to take the helm in September, with hopes of orchestrating a turnaround.

Chart Analysis: A Tale of Three Trends

Let's shift our focus back to the charts. The first, a one-year daily chart, depicts a textbook downtrend characterized by a consistent series of lower highs and lower lows. However, as an eternal optimist, I'm always on the lookout for glimmers of hope, and from a risk/reward perspective, potential opportunities may be emerging.

The Good: Signs of Life

Shares have shown resilience, rallying off recent lows. Momentum indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), have turned bullish, suggesting a potential near-term buying opportunity with upside potential.

The Bad: Limited Upside

This potential upside appears capped by the declining 50-day moving average, currently around $145. Should the stock decisively break above this level, a move to $170 and a major trendline could be in play. However, it's important to note that the overall downtrend has been tested and failed to break on previous occasions. As the saying goes, don't fight the trend.

The Ugly: A Decade-Long Warning

For a more ominous perspective, we turn to the 10-year weekly chart. Zooming out to capture a broader price history reveals an even more concerning picture: an eight-year rounding top formation resting on major support. To understand the severity of this support level, we reference the stock's 2007 IPO and utilize an anchored volume-weighted average price (VWAP). This critical support area, around $120, also aligns with a consolidation zone dating back to 2018. If any level is capable of providing a floor, this might be it. However, a break below this threshold could spell disaster, potentially sending shares plummeting to the $80 mark.

The Trade: Navigating the Inflection Point

As we approach next week's earnings report, Lululemon stands at a significant technical inflection point. I've been monitoring this stock for a considerable time but have yet to commit. From a risk/reward standpoint, I foresee three potential scenarios, with two favoring a long position ahead of earnings.

• Best Case Scenario: The stock holds the current support level and rallies back towards the longer-term downtrend line at $170. If this rally materializes, it could coincide with the new CEO's tenure beginning in September, amplifying discussions of a potential turnaround.
• Consolidation Scenario: Shares continue to consolidate within the support zone, possibly waiting until the weeks leading up to the next quarterly report for an upward move. This could be viewed as a 'resting pose with potential to pop.'
• Breakdown Scenario: A breakdown below $121 would signal a severe deterioration in the stock's performance, necessitating a swift exit and a reassessment of the trade due to extreme downside risk.

Successfully timing the turnaround of a beaten-down stock like Lululemon is inherently challenging. However, for those who believe in the company's fundamental story, the CEO change, and trust the technicals to hold these critical levels, now might be an opportune moment to consider initiating a position.

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