Monday, November 15, 2010

LULU Watch

lululemon athletica inc. (LULU), a Vancouver, B.C.-based retailer that specializes in high-end yogawear and athletic apparel for women, moved to bear phase on Friday, setting up the possibility of a pre-earnings entry point in anticipation of an upside surprise.

What it lacks in capital letters, it makes up for in great fundamentals and a strong chart.

ppspsarmacd obvh-a trend ma20ma50ma200
LULU $47.42

LULU releases earnings before the open on Dec. 9.

I'll take the fundamentals first:

Return on equity: 36%

Debt: Petty much zip.

Institutional ownership: Way, way high.

Revenues: Up each year for the past four years, and the trailing-12-month quarterly revenues point toward another up-year to come.

I'm far beyond the age of love at the first sight, but in this case . . .

On the chart, LULU has been on the rise since February 2009. A sideways correction last summer brought the price down, but beginning in late August it began rising again to a higher high.

More recently, the on-balance volume has been on the increase since late October.

LULU has shown upside earnings surprises on each of the past eight quarterly announcements, and in six of those cases the earnings were followed by price increases.

There is that matter of the bear phase on Friday by Person's Proprietary Signal (pps), coming on the fourth day of a more-or-less sideways move.

On the daily Person's chart, the price on Monday bounced off of the weekly midline, suggesting that level, $46.74, might well prove to be support.

Person's Table
ppspps openupper pivotlower pivot
LULU $47.42 $47.42 nov12 $51.02 +7.6% $45.28 -4.5%

The 20-day moving average provides the nearest support, and the swing support set in October was part of a sideways move and so is pretty weak.

Reversal Levels
  • $49.75, +4.9% (swing high)
  • $47.42 --- You are here.
  • $45.65, -3.7% (20-day moving average)
  • $44.16, -6.9% (50-day moving average)
  • $43.69, -7.9% (swing low)

Bottom line: I like LULU for my own account as a bull play in hope of an upside earnings surprise. Getting in this early allows time to participate in a pre-earnings run-up, and also is convenient for option plays, since the announcement comes 11 days before the December options expire.

Because of the fine fundamentals and good chart, I would be willing, on my own account, to take this play purely by buying the stock or perhaps buying a call. I would wait until a bull phase on the pps before entering.

If the pps remains in bear phase up to the announcement, then I would pass on the trade.

The volatility of the stock is increasing, with a widening of the Bollinger bands, and so LULU could also be played by selling a vertical put spread -- a bull put spread.

Setting the structure below the 20-day moving average means I would sell the DEC 45 put and hedge by buying the DEC 44 put, for $40 credit per contract. That is my maximum profit, if the stock stays above $45.

Maximum loss at expiration is $60 per contract if the stock falls below $44.

So, I'm looking at 66.7% profit on my risked capital, if the trade goes well.

The break-even point for the spread would be at a stock price of $44.60.

Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

  • h-a trend - Heikin-Ashi trend.
  • obv - On-Balance Volume.
  • pps - Person's Proprietary Signal.
  • psar - Parabolic Stop and Reverse
  • ma20 - 20-day moving average
  • ma50 - 50-day moving average
  • ma200 - 200-day moving average
  • macd - Moving Average Convergence-Divergence

About the glance: The colors indicate the state of each signal.
  • Signal Section:
    • pps, psar, macd: green for bull mode, red for bear.
  • Confirmation Section:
    • obv: green for uptrending, red for downtrending.
    • h-a trend: green for uptrending, red for downtrending.
  • Environment Section:
    • ma20, ma50, ma200: green for above the average, red for below the average.

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