After an impressive rally, Lululemon (LULU) has seen an 82% decline from its peak. Past attempts to buy the dip or when the stock entered bear market or oversold territory have failed.
However, a potential inverse head and shoulders pattern has emerged, suggesting a possible bottom. A successful breakout could target $119, but investors are advised to manage risk with a $99 stop-loss.
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Lululemon (LULU) experienced a dramatic surge of nearly 1,000% from its 2017 low to its 2023 high, only to see a significant downturn. As of its October low, the stock had fallen 82% from its peak. Despite numerous opportunities to "buy the dip," the stock continued its downward trend, even when entering bear market territory or becoming oversold.
Historically, simply buying when a stock enters bear market territory (a 20% decline) or becomes oversold (RSI below 30) has not been a successful strategy for LULU. The stock entered bear market territory early in 2024, and its 14-week RSI fell below 30 in April 2024, yet the selling pressure persisted. The indicator has largely oscillated between oversold and the midpoint of its range over the past two years, characteristic of a downtrend.
However, there are emerging signs of a potential technical turnaround. A potential inverse head and shoulders pattern has developed following a significant gap lower in September. A breakout from this pattern could propel the stock towards a measured-move target of $119. Risk management is advised with a stop-loss order at $99, given the prolonged downtrend.
This current breakout needs to be different from previous attempts. Over the past year, LULU has tried to break out from five bullish patterns, with only one showing a modest, short-lived advance. Sustained upside momentum is crucial for this pattern to be successful.
The larger opportunity lies in building a long-term base. If LULU can sustain its breakout and advance towards $130, a significant basing pattern of nearly six months could form. This would provide a stronger foundation for further upside and potentially challenge the long-term downtrend.
An 82% decline alone is not a sufficient reason to buy. The key is whether LULU can demonstrate the technical characteristics of a sustainable bottom. The current pattern offers an initial opportunity with defined risk, potentially marking the first step towards a more significant recovery.
