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Lululemon Breaks Out to Fresh Highs, but Are Shares Oversold?

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Lululemon Athletica Inc. (LULU) shares rose more than 2.3% on Wednesday, joining other clothing retailers buoyed by the fourth-quarter earnings news from Ralph Lauren Corporation (RL). The Polo brand clothier reported gross margins improved from 55.4% to 59.8% year over year due to a higher mix of full-price sales. Ralph Lauren stock soared more than 14%, pulling up the shares of Lululemon, Fossil Group, Inc. (FOSL) and PVH Corp. (PVH).

Many analysts have also been bullish on Lululemon over the past week. On Monday, SunTrust analysts raised their price target from $95.00 to $114.00, citing sales momentum and an inventory-to-sales ratio that was among the lowest in its peer group. On Tuesday, Stifel analysts raised their price target from $81.00 to $97.00, saying that investors are anticipating strong first quarter financial results and that Lululemon is likely to deliver. (See also: Lululemon Stock Stretches Toward High on Earnings.)

Technical chart showing the performance of Lululemon Athletica Inc. (LULU) stock

From a technical standpoint, Lululemon stock has risen sharply higher in a tight upward channel over the past two months. Wednesday’s session also created a bullish engulfing that could be a positive sign of things to come. The relative strength index (RSI) appears overbought at 74.76, but the moving average convergence divergence (MACD) could see a bullish crossover in the near term. These indicators seem to suggest more upside for the shares over the coming sessions.

[Find out more about determining whether a stock is overbought or oversold in Chapter 4 of the Technical Analysis course on the Investopedia Academy]

Traders should watch for a breakout from R1 resistance at $104.70 to upper trendline and R2 resistance at $109.59 on the upside. If the stock moves lower, traders should watch for trendline support levels at around $101.00 to hold. A breakdown from these levels could send the stock down to the pivot point and reaction lows at $95.67. Of course, traders will also be keeping an eye on first quarter earnings coming up later this month. (For additional reading, check out: Understanding Lululemon’s Business Model.)

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.

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May 25, 2018

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