Lululemon’s stock is at a critical technical juncture ahead of its earnings report, having fallen over 75% from its December 2023 peak of $500. While fundamental challenges like slower sales, increased competition, and leadership changes persist, recent charts show bullish momentum indicators offering a potential near-term buying opportunity. However, a break below the crucial $120 support level, identified via its 2007 IPO VWAP, could lead to a significant downside, potentially to $80, emphasizing the high-stakes nature of the upcoming earnings.
This week, we delve into the "ugliest charts" you might encounter in the market, focusing on a single stock examined across multiple time frames to reveal a challenging picture. The company in question, Lululemon, was once a high-flyer, gaining significant traction through the COVID-19 pandemic before peaking in December 2023. Since its peak, shares have plummeted over 75% from their all-time high of $500, now standing at a crucial technical make-or-break point.
Lululemon shares are currently stretched to their limits and are poised to face a significant test with next week's earnings report. Fundamentally, the company has grappled with decelerating sales and heightened competition, eroding its once-dominant position in the athleisure market. Compounding these issues are concerns over tariffs, inflation, and a series of lowered guidance reports over recent quarters. The company has also faced criticism for a perceived lack of product innovation and is undergoing a leadership transition, with former Nike executive Heidi O'Neill set to take the helm in September, aiming to orchestrate a comeback.
Turning our attention back to the technical charts, the one-year daily chart for Lululemon clearly illustrates a textbook downtrend, characterized by a consistent pattern of lower highs and lower lows. However, an optimistic perspective reveals potential signs of hope from a risk/reward standpoint. Shares have recently rallied from their lows, and momentum indicators like the Relative Strength Index (RSI) and Moving Average Convergence/Divergence (MACD) have both turned bullish, signaling a near-term buying opportunity with potential for upside.
This upside potential, however, appears capped by the declining 50-day moving average at $145. Should the stock manage to surpass this level, a run towards $170 and a major trendline could be in play. Yet, the overarching downtrend has repeatedly been tested and resisted breakage, suggesting caution against fighting the established trend.
For a more ominous view, the 10-year weekly chart paints an even starker picture, revealing an eight-year rounding top formation resting precariously on major support. This critical support level, identified around $120 using an anchored volume-weighted average price (VWAP) dating back to its 2007 IPO, coincides with a consolidation zone from 2018. This is a pivotal area that could potentially hold, but any decisive breach below it could trigger a significant downturn, potentially sending shares cascading to the $80 level.
As we approach next week's earnings, the stock finds itself at a major technical inflection point. From a risk/reward perspective, three scenarios emerge, with two favoring a long position ahead of the report. The most favorable outcome involves the stock holding its current support and rallying towards the longer-term downtrend at $170. Such a rally would likely align with the new CEO's tenure beginning in September, amplifying turnaround speculation. A second scenario sees continued consolidation within the support zone, with a potential upward movement weeks before the subsequent quarterly report, termed a "resting pose with potential to pop." The third and most concerning scenario involves a major breakdown. If shares dip below $121, the stock would be in serious trouble, necessitating a cut of losses due to extreme downside risk. Attempting to time the exact turnaround of a heavily beaten-down stock like Lululemon is inherently challenging. However, for those who believe in the fundamental turnaround story, the impact of the new CEO, and the resilience of these technical support levels, now might present an opportune moment to consider an entry.
